The day oil was worth less than nothing

A negative price sounds absurd. Selling something means receiving money. Yet on 20 April 2020, the main US oil contract ended the session at minus thirty-seven dollars and sixty-three cents a barrel.

To understand how that happens, you have to look not at the oil, but at the contract.

A world on pause

Spring 2020. The pandemic brings the planet to a halt. Planes are grounded, cars stay parked, factories slow down. Demand for oil collapses within weeks.

Production doesn't stop as fast. A well isn't a tap. Oil keeps coming out of the ground, and it has to go somewhere.

The problem isn't selling, it's storing

The WTI contract is delivered physically at Cushing, Oklahoma, a hub of pipelines and storage tanks. In spring 2020, the tanks fill at an unprecedented rate. Tankers are used as floating warehouses. Every extra barrel becomes a logistics problem.

The expiry trap

A futures contract isn't a security you can hold forever. It expires. The May 2020 contract expired on 21 April. At the last minute, its holder has only two options:

1. take delivery of a thousand barrels per contract, in Cushing, and find somewhere to put them;
2. sell the contract to someone who does have room.

Most holders are financial players. They have no tanks, no trucks, no refinery. On 20 April, the day before expiry, they all try to get out at once. The buyers have nowhere to store anything. To get rid of their contracts, sellers end up paying whoever will take them.

What it didn't mean

That day, oil hadn't lost all its value. Brent, delivered elsewhere and differently, stayed positive. So did the June WTI contract. The next day, the May contract was back above zero.

The negative price didn't measure the value of oil. It measured the cost of having nowhere to put it.

The lesson for traders

Many retail traders don't trade oil itself, but a product that tracks it: a CFD, an ETF, a certificate. 20 April 2020 was a reminder of three things:

• a derivative follows the rules of its contract, not your intuition about the underlying;
• an expiry can create moves unrelated to normal supply and demand;
• an "obvious" price floor — zero — doesn't exist unless the contract imposes it.■

Before trading an instrument, ask what happens on the day it expires.