The real reason oil prices went negative in April

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Unusually high open interest in West Texas Intermediate was one of the two causes for the benchmark plunging into negative territory in late April, according to a report by the U.S. Commodity Futures Trading Commission.

The high open interest, the report said, coincided with a shortage in storage space and the unprecedented destruction of demand resulting from the coronavirus pandemic.

The report added that open interest in WTI reached 634,727 contracts on April 2. This compared to a 12-month average peaking at 430,000 contracts.

The price of West Texas Intermediate tumbled below zero and reached -$37 per barrel in late April as traders rushed to offload their positions on the May contract as the storage space shortage and the consumption slump combined to make physical delivery of the commodity undesirable, to put it mildly.

“The intraday WTI destruction today is certainly epic in scale, which is largely a case of jitters ahead of the WTI May 2020 futures contract expiring tomorrow and storage fears finally materializing,” Louise Dickson, an analyst at Rystad Energy, said in a statement at the time. “But if you have been watching the physical spot prices in the North Sea, currently trading in the $15-18 range, this drop in WTI May 2020 futures isn’t as shocking.”

April, as well as May, were not the best months for oil, indeed. That was the time of the first nationwide lockdowns that came after China’s oil demand slumped because of its own lockdown in response to the coronavirus epidemic. By June, the epidemic had become a pandemic, and it had become clear it will be quite a while before demand for oil recovers to pre-pandemic levels, if ever.

“While some may have hoped for a more definitive analysis, we simply cannot provide that at this time – just as we cannot confirm or deny media reports of investigations tied to these events,” CFTC chairman Heath Tarbert said following the release of the report.