The benchmark price of crude in the United States dropped like a stone on Monday, with oil futures for May delivery falling to a jaw-dropping -$37.63. That’s negative territory, meaning that sellers of futures for the soon-to-expire May oil would actually have to pay buyers to take the commodity off their hands.

“It was a shock,” says Charles Olson, professor of the practice in the logistics, business and public policy department at the University of Maryland’s Robert H. Smith School of Business. “We really are in uncharted waters.”

And it says a great deal about the state of the U.S. economy, now firmly in the grips of the coronavirus crisis.

For the past six weeks, Americans have been driving less and flying way less, with states adopting stay-at-home orders and other curbs on business and leisure activities. That’s left a glut of supply, far more oil for delivery than refineries wanted and more than could be easily stored, with much of the nation’s storage facilities nearing capacity.

Delivery, in the futures market, means just that – physical delivery.

“If there is no place to put the oil, that’s a problem,” says Olson. “It was an inventory imbalance situation. It nonetheless produces an odd pricing structure.”

The market adapted, he notes, with the price climbing from negative-$37 Monday to $5 early Tuesday morning. “It adjusted pretty quickly, as markets do, but it sure got everyone’s attention.”

On Tuesday, the contracts for oil futures for May delivery closed out, while futures for June, July and August delivery continued trading. Prices for June remain low but held onto positive territory.

Investors were betting that the price of oil would be higher for June, anticipating that with plunging profits and soaring losses in oil, producers will opt to produce less crude, and that Americans, meanwhile, would be driving more, putting supply into better balance with demand.

Of course, those are just bets, Olson says. In truth, no one knows how the next few months are going to play out.

Cutting production

On April 12, Saudi Arabia, Russia and the United States announced they would lead a multinational coalition to slash oil production, as demand dwindled as a result of the coronavirus crisis, and as a feud between Moscow and Riyadh weighed on oil prices. 

“It wasn’t enough,” Olson says, as the plunge in demand outstripped the agreed-upon cuts in production. Adding to the challenge is that members of the 13-nation Organization of the Petroleum Exporting Countries are known to agree to production cuts, then defy them.

And, now, as a pandemic drags down economies around the world, countries are facing increasing pressure to produce and sell oil, to stimulate their economies, to get people working and spending again. “There is more pressure now than ever before, not only to open more in the U.S., but to open around the world,” Olson says.

“Because if you can’t cut off supply, then the only other way to balance the oil market is to open things up so you increase demand.”

Typical global demand for oil is roughly 100 million barrels a day, but amid the coronavirus pandemic, it fell quickly, suddenly – to about 75 million. “That’s why storage in the U.S. began to fill up so rapidly. Production is largely automated. And it’s not easy to turn off and on again an oil well.” 

In fact, turning off production at some major production sites means maybe never getting them back on again” Olson says. “A lot of U.S. production is what I would call ‘must-produce wells,’ you either produce with them or you lose them forever, or at least lose some of their capacity forever."

That’s how markets got to this point. 

Much of the oil that’s stored in the United States is in Cushing, Okla. In February, Cushing’s storage capacity was 50% full. This week, more than 80%.

Getting tighter and tighter, Olson says, and setting the stage for this very weird, “really surprising” week.

“The very fact that the prices were negative means that literally nobody saw this coming. Because if anybody had seen this coming, they could have planned on it, and made a great fortune.”

Olson, a former energy industry executive, is an expert on the cost of capital to public utilities and all aspects of public utility regulation and energy economics. He has consulted for more than 100 utilities as well as industrial companies, state agencies, trade associations and environmental groups. Contact him at [email protected].