First, the really brief version is:
- It costs $$$ to store oil
- Due to the lack of demand in the world for oil right now (coronavirus lock downs in DMs have caused a huge reduction in driving and flying demand for oil) oil is not being used as much (compared to normal).
- So, the oil that has continued to be extracted has gone into storage
- Storage is now filling up.
- There are very few options now to store oil
- So, if you have oil, perhaps from taking delivery from a CL contract that is expiring on Tuesday 21 April (CL May contract is expiring then) you have to pay someone. That is, the 'price' of the oil has turned negative.
The longer version is:
- Cl is a physical contract (it is deliverable)
- delivery point is Cushing, OK
- If a trader holds a CL contract long at the end of trading in the contract the trader is obliged to take delivery of the oil
- The May expiry CL contract ends on Tuesday 21 April 2020. In the final few days of trading most volume switches over to the next contract (in this case the June). This happens every month with little drama. Obviously not this time though.
- Traders holding CL May contracts long have been trying to exit, to sell, but with storage in Cushing booked and no place to store the oil they have to sell at any price, in this instance at negative prices (paying people to take the contract, and thus the physical oil, off their hands).
There are plenty of more details that could be added, and there are repercussions for the June contract, and Adam has been posting on the looming crunch for ETF buyers of USO: There is still another shoe to drop in oil
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Oh, and I posted this earlier, the backdrop to all this:
There are oil market dynamics in play in the sub zero price (May contract) but the fundamentals behind the move are:
- Demand has evaporated due to the coronavirus lockdown - MUCH less driving and flying hence lack of demand.
- Oil pumping continued with the product going into storage
- Storage is filling up, hence you'll get paid to take physical
