Yesterday, the price on the futures contract for West Texas crude, that is due to expire Tuesday (today), went into negative territory of USD – 37.63 a barrel.

Yesterday, the oil market witnessed a never before seen event in its entire history, which is the price on the futures contract for West Texas crude, that is due to expire Tuesday (today), went into negative territory of USD – 37.63 a barrel. Such a movement could be attributed to the ongoing Covid-19 situation. To be specific, since the pandemic led to a global economic halt, there is already much unused oil stored that American energy companies have run out of space to store it. It is important to note that the settlement of the futures contract, which expires today, would involve a physical delivery of the oil, which comes with a burden of high carrying costs and the current low demand and almost no place of storing it. Such situation led to a selloff, which resulted in the WTI futures contract ending up in negative territory. Note that the futures contract due a month later settled at USD 20.43 per barrel, which is by far the largest spread the two contracts in history.

Since the start of the year, oil prices have plummeted on the back of the of the outbreak of Covid-19 and a breakdown in the original OPEC+ agreement. To put things into a perspective, Brent Crude recorded a 59.5% YTD decrease. According to the agreement, both OPEC producers and its competitors like the U.S., Mexico and Canada came together and agreed to a 9.7 million barrels per day production cut.  From 9.7 million bpd in May to June, the cuts will decline to 7.7 million bpd for the period July to December 2020, and then further to 5.8 million bpd until the end of April 2022. Note that the original agreement would have seen a cut of 10 million bpd for an initial two-month period, however Mexico insisted on reducing their output by 100,000 bpd instead of the requested 400,000 bpd.