The Day Oil Went NEGATIVE

On April 20th 2020, oil markets did something they never had done before. They crashed, went below zero and closed the day at less than -$30. A negative price means sellers were essentially paying buyers to take the oil out of their hands. Just FYI, prices did rebound starting the next day.

If you’re an oil trader, there are a number of different ways you can trade, and the most popular is WTI Futures Contract. It's a contract that says basically that I'll buy a thousand barrels of oil from you at a specified point in the future, or I'll sell a thousand barrels of oil to you at a specified point in the future. It's just a way to bet on or predict whether oil is going up or down. These contracts are settled monthly. The contract in question here had to be settled on 21st April 2020, so all of this happened on the last trading day for it.

In 2020, as the pandemic decimated all trade in the world, the demand for oil essentially collapsed. Despite a cut in production by the major oil-producing nations, there was still no place for the oil barrels to go. The oil industry produces millions of barrels a day and there were no takers for the oil since there was no place for them to store so much oil. Nobody knew how long the pandemic and subsequent lockdowns would go on and if there was no surety of the oil going to clients or consumers, it would mean storage costs in the millions. It wouldn't have been so surprising if the oil price had “only” fallen to zero, given the circumstances I outlined above. But the oil price actually went to -$38. It went far lower than anyone could have expected.

One executive from a commodity-related company even said that if the oil price stayed around $20 per barrel for a while, 80% of all independent oil-related companies would have to shut their doors in their state in the USA!

In between all of this mess, there were some traders who made absolute fortunes in one single day. To put it into numbers, nine traders netter more than $600 million between themselves. This number is higher than most companies would profit in a given year.

So what were these traders doing on 20th April? They were buying contracts that gave them an obligation to buy oil at whatever the price ended up at 2:30 pm on that day. So they're basically placing a bet that oil would fall during the day. And they were simultaneously selling lots of oil as well. How much profit they would make would be the difference between what they buy the oil for and what they sell it for. Selling, then buying back an asset is called shorting, read about it here if you don’t yet understand how it works.

Now, we now know throughout that day, the price kept dropping. So, it was an ideal situation for these guys. They would be able to offset it and buy oil at much cheaper rates, at the end of the day. Around the end of the trading time, and this is the best explanation possible in my opinion, desperation and panic increased in the market and trading volumes went way up.

And then the unthinkable happened, which is that oil passed into negative territory. And it fell to a record level of -$38. As you can imagine, these traders’ profit at max would be the difference between -$37 and the prices of all the contracts they sold. Even if they squared off their trades a little before the low, they would have booked a huge chunk of change.

To repeat what I had said earlier, this is the first time ever it happened, so no one could have expected this. It is difficult to think of a situation where you enter a trade and you get paid on both sides, you get paid both to sell (from let’s say $20 to $0) and to buy (from $0 to let’s say -$25).

All of trading is a zero-sum game, so when these traders won big, there were obviously parties, which would include big banks and financial institutions, who lost big. And while these traders may be criticized for “preying on the weak”, as short sellers often are, in the trading community, they'll go down as superstars.

That’s it for this article. Let me know if you have any questions.

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