Why the oil market just crashed below $0 a barrel — 4 things investors need to know
Oil just did something that made even market veterans shake their heads in wonder — the soon-to-expire May contract for West Texas Intermediate crude on the New York Mercantile Exchange traded, and closed, in negative territory.
The negative finish means the holder of a long position would be required to pay someone to take that contract off of their hands. Negative oil prices would seem to be a foreboding sign about the outlook for an economy kicked in the teeth by the COVID-19 pandemic. It would also seem, at first glance, to point to ever-cheaper gasoline prices at the pump — a potential positive for hard-hit consumers.
Note the contango Indeed, crazy things — albeit not this crazy — sometimes happen when a futures contract moves into expiration. The heaviest trading volume and positioning had long since moved to the June contract CLM20, -14.14% , which will become the front month when the May contract expires Tuesday.
Long-term market bulls argue that the steepness of the contango curve — the December 2020 contract CLZ20, -2.63% is trading above $32 a barrel — seems to indicate optimism for an eventual recovery as economies move past the pandemic shutdowns and demand for crude revives in the second half of the year.
“Supply is threatening to overwhelm storage in coming weeks, and the flood of crude oil shows no signs of abating,” said Robert Yawger, director of energy at Mizuho Securities USA, in a Monday note. If crude storage levels continue to rise at their current clip, U.S. inventories will break their all-time record in two weeks and reach maximum capacity in eight to nine weeks, he said.
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