Oil Prices Turned Negative for the First Time in History

A History-Making Day

On April 20, 2020, history was made in the global oil market. Oil prices collapsed so dramatically that they went negative. Oil prices are experiencing an extraordinary period of deflation that surpasses anything that has ever previously been seen in the global oil market. The main benchmark for oil pricing is known as U.S. West Texas Intermediate (WTI). On April 20th, WTI crude oil prices plummeted to negative $37.63. For the average American investor, the concept of negative oil prices is somewhat mind boggling. Negative oil prices mean that some commodity traders would actually pay buyers to take oil off their hands. For example, if someone was able to take away 1,000 barrels of oil from producers in Cushing, Oklahoma, they would be paid $37,630 to take delivery of that oil based on a price of negative $37.63 that was quoted in the oil futures contracts (Irwin, 2020). Following historic highs of $144.29 in July 2008, almost no global economists or energy analysts would have predicted aa price collapse of this magnitude.

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Negative Oil Prices

There are numerous socioeconomic consequences when oil prices collapse. The threat of extended periods of low oil and gas prices creates a number of significant economic implications for the entire global economy, rather than just the oil and gas producers themselves. Economic partnerships and global alliances have been known to rise and fall over the price of oil.

From a domestic standpoint, high oil prices once encouraged the development of technologically advanced forms of fossil fuel extraction, like tar sands production and the shale oil extraction in West Texas. Moreover, when oil prices are high, investments in alternative modes of transportation and renewable forms of energy surge. While oil and gas companies are undoubtedly among the first to be immediately impacted by a drop in crude oil prices, extreme consequences can often be experienced all over the world, within nations that are dependent on fossil fuels for revenue.

As oil prices went negative for the first time in history, this meant that producers who were trying to sell oil would have had to have paid a buyer to take delivery of any oil. It is important to understand that oil is traded based on futures contracts. Because of this, futures contracts stipulate that April buyers would have to take possession of oil in May. When April buyers started to realize that there would be no place to store more oil in May, prices collapsed to below zero.

This eye-popping collapse is representative of the biggest decline ever experienced. During the beginning of 2020, oil traded at over $60 a barrel, followed by a precipitous collapse through the beginning of the year. One of the main issues that has created an intense amount of anxiety for oil traders is the fact that the world is running out of places to store excess oil.

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Oil Market Carnage

What has caused the global oil market carnage? While the short-term demand for oil has caused the market to plummet, the origins of the recent oil market struggle can be attributed to the overall oil supply glut that began in 2014. Between June 2014 and January 2015, the West Texas Intermediate (WTI) and Brent crude oil prices each fell by upwards of 60 percent (Fantazzini, 2016).

A plethora of new oil-related discoveries, combined with rapidly improving technology for hydraulic fracking and horizontal oil drilling, led to an oil-drilling frenzy in the United States. While significant new reserves of accessible and dependable sources of crude oil put an end to global anxiety related future energy-related shocks similar to those felt during the 1973 Arab Oil Embargo, the surge in American oil production sent oil prices down from the previous highs that were seen prior to the Great Recession.

Surging American Oil Production

Before the surge in American oil production, oil and gas producers struggled tremendously to keep up with the increasing demand for fossil fuels in China. As a result of this supply gap, crude prices skyrocketed and economists predicted dire peak oil scenarios (Krauss, 2019). The resurgence of oil production in 2014 and 2015 lead to a clear departure from the previous oil market outlook that was predicted in the early 2000s.

In 2014 and 2015 alone, investments in the overall development and extraction of fossil fuels climbed to $580 billion, which outpaced all other energy-related investments (Pirani, 2018). The dramatic resurgence of oil and gas discoveries, coupled with new investments in extraction techniques, helped to push the world out of the global economic slowdown following the Great Recession of 2008. During this period of time, new horizontal drilling technologies, advanced hydraulic fracking, and deep-water oil extraction became commonplace for the first time in the oil and gas industry. While these oil and gas extraction technologies fueled a resurgence of fossil fuel energy production, they also inadvertently caused the price of oil to fall.

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The Trade War

After the U.S. became the world’s largest oil producer in 2019, the Trump administration’s trade war initiated a period of sideways oil trading. The trade war hit China particularly hard during the fall of 2019, with Chinese oil producers having experienced the largest oil price decline in three years. Little did they know that the economic situation would ultimately get much worse. While the trade war continued to put pressure on the oil market, the Organization of the Petroleum Exporting Countries (OPEC) expressed significant anxieties related to the rising oil inventory from U.S. production. Although, the American oil and gas industry also suffered considerably because of the trade war. Since U.S. oil exports depend on a rising demand for oil products and continued global economic growth, Chinese tariffs on U.S. products ended up hindering growth and stunting global oil demand. As a result of this, the trade war caused global oil demand to fall throughout 2019.

Rising OPEC Tensions

Following the 2019 trade war concerns, global oil prices also took a hit because of tensions within OPEC. Rumors that leaders of OPEC had been unwilling to come to an agreement to deepen oil production cuts sent oil prices down significantly on Black Friday. OPEC tensions were strained over a vital December meeting in Vienna, Austria. As U.S. oil output continued to hover near record levels, OPEC had been discussing opportunities to counteract the resurgence in American oil production. At the December meeting, leaders were expected to announce an extension to the oil production output cut of 1.2 million barrels per day. Although, pushback from Russia ultimately sunk the deal to cut production. Russia ended up not complying with OPEC agreements to reduce oil production, which ultimately killed the chance to stabilize oil prices at the end of 2019. Oil production data from the Russian Energy Ministry showed that Russia produced 11.244 million barrels per day in November 2019, which exceeded their agreed upon production quota by over 54,000 barrels per day (Kool, 2019).

Following the increased tensions among OPEC in 2019, the tensions turned into an all-out oil price war between Russia and Saudi Arabia in March 2020. The continued battle over control of the global oil market significantly increased geopolitical tensions between Russia, Saudi Arabia, and the United States. When the U.S. became the largest oil producer in the world in 2019, Saudi Arabia and Russia became increasingly concerned about American influence over the world’s oil production. In order to offset the surge in American oil production, Saud Arabia began to advocate for oil production cuts throughout OPEC’s member nations and Russia. However, negotiations around the production cuts once again failed to gain traction. While Russia had formed an alliance with OPEC in an attempt to try to counteract American oil dominance, Russia was unwilling to go along with the production cuts.

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The Oil Price War

In a complete shock to the rest of the oil-producing world, Russia announced that they were breaking from the OPEC alliance to increase oil production in March 2020. Russia’s leaders decided that it would be more advantageous to continue to drown the world in oil in an attempt to bankrupt the U.S. shale oil Industry. Since U.S. shale companies rely on higher oil prices to make a profit off the energy-intensive forms of oil extraction, Russia had hoped to extend the period of low oil prices to put the nail in the coffin of the U.S. shale oil industry.

Coronavirus Pandemic

In the midst of the price war between Russia and Saudi Arabia, the energy industry was still reeling from the economic meltdown caused by the coronavirus pandemic. The coronavirus decimated the global oil market. Throughout March and April, the demand for products refined from oil and gas had collapsed tremendously. Airlines were grounded, while workers around the world were given orders to stay at home. Since the transportation sector is the biggest consumer of fossil fuels, no transportation meant that oil consumption had nowhere to go but down. The huge drop in gasoline consumption as a result of stay-at-home orders pushed down both the price of oil and gasoline. According to the International Energy Agency, demand for oil in April 2020 was 29 million barrels per day lower than it was in April 2019, which has returned oil consumption back to 1995 levels (Huang and Stevens, 2020).

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Finding a Bottom

As oil prices continued to fall and demand plummeted ever further, Russia and Saudi Arabia ultimately came to an agreement to cut oil production by 9.7 million barrels per day beginning on May 1st (Huang and Stevens, 2020). While this news sent oil prices up the day after it was announced, the collapse in global demand persisted, with many energy analysts conveying uncertainties about whether this production cut would ultimately have any impact on the global supply of oil. Aaron Brady, the vice president for energy oil market services at London-based IHS Markit, says, “If you are a producer, your market has disappeared and if you don’t have access to storage you are out of luck” (Reed and Krauss, 2020). On the other hand, Louise Dickson, an oil markets analyst at Rystad Energy, says, “Traders have sent prices up and down on speculation, hopes, tweets and wishful thinking” (Reed and Krauss, 2020).

The principles of economics are based on factors related to supply and demand. The dramatic rise in American fossil fuel production outpaced the world’s need for energy, even before consumption collapsed because of the coronavirus pandemic. As investors continue to look forward to a post-pandemic economy, questions still remain about how quickly the oil market may bounce back to stable levels. It’s clear that the collapse in oil prices is not sustainable for oil and gas producers, and as prices head below zero, many oil and gas producers may not live to see a post-pandemic economy.


Fantazzini, D. (2016). “The oil price crash in 2014/15: Was there a (negative) ?nancial bubble?” The Journal of Energy Policy: Vol. 96, No. 1, pp. 383-396.

Huang, E., and Stevens, P. (2020). “An oil futures contract expiring Tuesday went negative in bizarre move showing a demand collapse.” CNBC.

Irwin, N. (2020). “What the Negative Price of Oil Is Telling Us.” The New York Times.

Isidore, C. (2020). “What does it mean when oil prices go negative? No, it doesn’t mean the gas station will pay you to fill up.” CNN.

Kelly, S. (2019). “Oil slips as trade worries offset cushing drawdown.” Reuters.

Kool, T. (2019). Is Today’s Oil Price Plunge A Sign Of Things To Come? Yahoo Finance.

Krauss, C. (2019). “Flood of Oil Is Coming, Complicating Efforts to Fight Global Warming.” The New York Times.

Pirani, S. (2018). “Burning Up: A Global History of Fossil Fuel Consumption.” Pluto Press: London.

Reed, S., and Krauss, C. (2020). “Too Much Oil: How a Barrel Came to Be Worth Less Than Nothing.” The New York Times.

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