EME 801
Energy Markets, Policy, and Regulation

A Market Squeeze


A very interesting and entertaining thing happened in the crude oil market in April 2020, when the price of oil on the futures market went negative, trading at -$37.63 per barrel. This means that if you were a potential buyer of crude oil, someone would have paid you $37.63 for every barrel of oil you agreed to buy. I don't know about you, but no one has ever paid me to fill my car's gas tank. It usually works the other way around. What on earth happened here? This short blog post from RBN Energy has a good explanation. The reason for this price craziness has to do a little bit with panic in the oil market because of the coronavirus pandemic and a little bit with how futures markets work. Basically, what happened was that there were a bunch of crude oil traders who had contracts to buy crude oil for delivery in May 2020. Those traders either had to take physical delivery of a bunch of barrels of crude oil in May, or find someone else to assume their contract (this is called "closing one's position" in commodity market parlance). Well, since the pandemic had hit and crude oil demand had collapsed, there was no one in the market who really wanted to buy crude oil from these traders. And, there was no place for these traders to physically put the crude oil that they were obligated to take in May 2020. So these traders got caught in a market squeeze and had to pay others to close their positions. It's crazy, and hasn't happened in the crude oil market before...but it makes perfect sense when you realize how this market actually works!