The answer to why the oil market collapsed on Monday is simple: Investors have found themselves with nowhere to stash their black gold.
Consumers, producers, and speculators who bought futures—agreements to purchase a certain amount of oil at a set price and time—face a crisis as the contracts come due on Tuesday. Many fear that the biggest oil storage facility in the world will run out of room. In 2016, Business Insider identified Cushing, Oklahoma, as “the center of the oil universe,” noting that the town of 7,659 residents is home to 13 percent of the United States’ holding capacity for crude.
“The futures market depends on Cushing, Oklahoma,” Amy Jaffe, director of energy security and climate change at the Council on Foreign Relations, told The Daily Beast. “And the futures market expects Cushing, Oklahoma, is going to run out of capacity in mid-May.”
The looming Cushing storage crunch is particularly punishing for those trading in American petroleum, for which the price benchmark is West Texas Intermediate—also called Texas light sweet—crude. According to Jaffe, British and Persian Gulf operators have the option of putting their excess oil onto ships.
But to get American oil to a boat instead of a storage tank in Cushing, purchasers first must move it via train or truck or pipeline, and many have made no such arrangements. Which is why futures closed at -$13.10: Some had to pay to get rid of their oil.
Why such a glut? The economic shutdowns across the United States and the planet brought on by the coronavirus pandemic.
“Prices have plummeted because there’s no demand for oil,” said Samantha Gross, a former official at the U.S Department of Energy and a fellow at the Brookings Institution. “People aren’t driving, they aren’t flying.”
The situation is “unprecedented,” according to Gross, and may not soon improve. For capacity to increase, the American and international economies must rebound and begin consuming oil, not just the barrels of back supply but also new crude still emerging from wells.
“We’ve never seen negative oil prices like this. We’ve not seen demand fall so far so fast before. This is new territory for all of us,” Gross said. “Even when things get going again, there’s still going to be all this inventory.”
Jaffe noted that many producers are physically disincentivized from shutting down their reservoirs, which often depend on naturally occurring underground pressures to extract oil. They fear that if they stop production and close off their wells, they may never be able to get the crude out again. She also noted on her blog a Wall Street Journal report that 20 Saudi tankers carrying some 40 million barrels are due to arrive in American ports next month.
Meanwhile, those holding the futures for June must frantically look for somewhere to put the oil before the contracts expire on May 19.
“If they can, the market might not collapse,” Jaffe said. “If not, the same thing will happen again.”