Why Oil Prices Went Negative on April 20, 2020

On Monday, April 20, 2020, the May 2020 West Texas Intermediate (WTI) crude oil futures contract on NYMEX settled at -$37.63 per barrel, the first negative price in the contract’s history since it was listed in 1983. It happened because the contract required physical delivery of oil in Cushing, Oklahoma, storage there was nearly full, and traders still holding long positions one day before expiry had to find someone to take the obligation off their hands, even if that meant paying them.

In short: The COVID-19 pandemic cut oil demand at a time when the market was already oversupplied. Storage at Cushing, the delivery point for WTI futures, was near capacity. On the second-to-last trading day of the May contract, holders who could not take delivery had to sell, and there were few buyers with storage. Between about 2:08 p.m. and 2:30 p.m. Eastern time, the price fell from zero to an intraday low of -$40.32 before settling at -$37.63. The CFTC’s interim staff report, published November 23, 2020, describes these fundamental and technical factors but does not identify a single root cause. Other WTI contract months stayed positive; the June contract settled near $20.

The misconception: “oil was worthless”

The headline “oil went negative” led many people to think a barrel of crude had no value. That is not quite what happened. One specific futures contract, for delivery of oil in a specific place during May 2020, traded below zero for a few hours, on the day before it expired.

The CFTC report notes that “All other expirations in the WTI Contract settled at positive prices on April 20.” The June contract, for example, settled around $20.43 (the May settlement of -$37.63 plus a May-June spread of -$58.06). What went negative was the price of a near-term delivery obligation in a place with nowhere to put the oil.

Background: how the WTI contract works

The NYMEX WTI Light Sweet Crude Oil contract is one of the most traded commodity futures in the world. The details are in crude oil futures explained, but the key facts here are:

Feature	WTI crude oil futures (NYMEX)
Contract size	1,000 barrels
Tick	$0.01 per barrel = $10 per contract
Settlement	Physical delivery at Cushing, Oklahoma
May 2020 last trading day	April 21, 2020

Physical delivery means that anyone still holding a long position when trading ends must accept 1,000 barrels per contract at Cushing, which requires access to pipeline capacity and storage there. Most traders, including funds and individuals, have no such access, so they close or roll their positions before expiry. The difference between physical and cash settlement is covered in physical vs cash settlement.

The ICE Futures Europe WTI contract, by contrast, is cash-settled. The CFTC report covered only the NYMEX contract.

Why storage was the problem

Demand collapsed

The CFTC staff report describes “an already oversupplied global crude oil market” hit by “an unprecedented reduction in demand caused by the novel coronavirus pandemic.” The World Health Organization declared a pandemic on March 11, 2020. In March, the OPEC Plus production agreement collapsed, adding supply. A new agreement to cut output was announced in April, but the cuts were not due to begin until May 1.

At the close on Friday, April 17, the May contract had already fallen below $20, to $18.27.

Cushing was filling up

Cushing is not just the delivery point for WTI futures; it is a major hub in the US crude pipeline network. Citing the US Energy Information Administration, the CFTC report says Cushing’s 75.8 million barrels of storage capacity represented about 44% of crude oil working storage capacity in the Midwest and about 11% of all commercial crude storage in the US.

The report states that “By March 2020, the working storage available at the Cushing facility was near capacity,” which “raised procedural concerns related to the mechanics of pipeline transportation and storage.” Much of the remaining space was already contracted. If you held a long May contract and had no storage lined up, taking delivery was not a realistic option.

What happened on April 20

The trading day started on Sunday

As the report explains, the April 20 trading session for WTI began at 6:00 p.m. ET on Sunday, April 19. The May contract opened at $17.73.

The settlement rule mattered

April 20 was the May contract’s penultimate trading day. Under NYMEX rules, the June contract had become the “active” month on Friday, April 17. That meant the May contract’s daily settlement on April 20 was calculated from the volume-weighted average price of calendar spread trades (May versus June) between 2:28 p.m. and 2:30 p.m. ET, applied to the June settlement. In other words, the May settlement reflected the May-June spread.

The collapse

From the CFTC staff report:

Time (ET), April 20	What happened
About 1:00 p.m.	Market integrity controls begin triggering as the price approaches zero
About 2:08 p.m.	May contract trades below $0 for the first time
2:08 to 2:28 p.m.	Price falls from $0 to -$39.55
2:29 p.m.	All-time intraday low of -$40.32
2:30 p.m.	Settlement at -$37.63
About 8:04 p.m.	In the next session, May trades back above $0
April 21	May contract expires, settling at $10.01

From Sunday’s open to the intraday low, the price fell $58.05 per barrel. The May-June spread widened from -$6.76 at the previous close to -$58.06. By the end of April 21 the spread was back to -$1.56, “consistent with levels seen in mid-March.”

Open interest was unusually high

Normally most traders leave an expiring contract well before its last days. The report found:

Open interest in the May contract fell from 634,727 contracts at the start of April to 108,593 at the start of the April 20 session.
That 108,593 was about 69.4% higher than the trailing 12-month average for the penultimate day (64,101 contracts).
About 95,000 contracts of open interest were closed during the April 20 session, more than double the usual reduction.

At the same time, “over 77% of commercial positions, and 88% of non-commercial positions, were closed out” during the first three weeks of April, and “roughly 90% of volume on April 20 was in June or later contracts.” The report also notes that most volume in the May and June contracts that day traded before 2:00 p.m. ET, while prices were still positive, and that the number of reportable traders still holding positions at expiry was consistent with prior months.

Liquidity drained away

The report observed “a decrease in liquidity in the May Contract” that “started well before April 20.” Over 30 dynamic circuit breakers (brief automatic pauses) were triggered in the May contract and more than 10 in the May-June spread. These pauses slow trading; they do not cap the day’s move. In the report’s words, “The speed and magnitude of the price moves observed on April 20 in the May Contract, particularly between 1:00 p.m. ET and the end-of-day settlement at 2:30 p.m. ET, were exceptional.”

Was the exchange ready for negative prices?

CME Group had warned that negative prices were possible. The report lists notices on April 3 (flagging certain energy products for potential negative price trading), April 8 (a clearing plan for options if the underlying went negative, including a switch to the Bachelier pricing model, which unlike Black-Scholes can handle negative prices), April 13, and April 15 (inviting members to test negative prices). On April 20, before prices went negative, CME’s Global Command Center told members that certain energy futures, including WTI, “would have no low limits and could trade negative.”

Not every broker had its systems ready. That turned out to matter a great deal.

Worked example: what it cost to be long

Using the real 1,000-barrel contract:

A long position held through the day

Previous settlement (April 17): $18.27
April 20 settlement: -$37.63
Change: -$55.90 per barrel
Loss per contract: $55.90 x 1,000 = $55,900, in one trading day

That loss was collected as variation margin that evening. A trader who had a few thousand dollars in the account would have ended the day with a large negative balance, owed to the broker. How daily settlement works is explained in how futures margin works.

A short position opened at the low and held to expiry

The reverse also happened. A trader who sold at the settlement price of -$37.63 (receiving $37.63 a barrel to take on the short) and held to the April 21 expiry at $10.01 lost:

$10.01 - (-$37.63) = $47.64 per barrel, or $47,640 per contract

The point is not who was right. It is that the same contract moved by tens of thousands of dollars per contract in both directions within about 24 hours.

Who lost money

Retail traders at brokers whose systems were not ready

Interactive Brokers disclosed in its quarterly filing that it would recognise a loss of about $104 million related to the event, after deciding to compensate certain affected customers. In September 2021, the CFTC found that the firm had notice that oil futures could trade negative but did not adequately prepare its systems. According to the CFTC order, negative prices were not displayed to customers, customers could not place negative-priced limit orders, and margin requirements were not correctly enforced; hundreds of customer accounts suffered losses initially estimated at more than $82.57 million. The firm paid a $1.75 million penalty and received credit for compensation it had already paid.

Investors in a Chinese bank’s oil product

Bank of China had sold a retail product called “Yuan You Bao” that gave investors exposure to WTI futures, and tens of thousands of its investors suffered heavy losses when the May contract settled below zero. On December 5, 2020, China’s banking regulator fined Bank of China 50.5 million yuan for failures in risk management, stress testing, and disclosure, and penalised individual managers.

Others affected

Canadian and Mexican crude grades sold in the US are priced against WTI, as the CFTC report notes, so the dislocation rippled into physical pricing in Canada. The largest US oil ETF, the United States Oil Fund (USO), was not fully invested in the contract that went negative, and its annual report spelled out why that mattered: “If USO had been fully invested in that contract during this time, USO’s per share NAV would have fallen below zero.” The same report noted that the 30-day annualised volatility of front-month WTI futures reached 984% in May 2020, against an average of 35% in 2019. USO’s own April 2020 is told in futures ETFs explained.

What the CFTC report did and did not conclude

The report is explicitly interim. It “does not analyze the propriety of trading by any particular trader,” does not consider “whether forces outside of supply and demand impacted prices,” and does not “identify the root cause(s) of any price movement.” It describes the coincidence of:

Severe oversupply and collapsing demand
Storage at Cushing near capacity
Unusually high open interest in the May contract entering its penultimate day
Reduced liquidity that began well before April 20
A settlement mechanism tied to a two-minute window of spread trading

It also notes that the market integrity controls “did not halt trading in the active June Contract or the WTI market as a whole.”

What can go wrong: the lessons

Physical delivery is real. If you cannot take delivery, you must exit before the last days. Being one of the last holders of an expiring physical contract is dangerous.
Prices can go below zero. Any risk system, model, or order screen that assumes otherwise can fail at the worst time.
Losses can exceed your deposit, sometimes many times over, in a single day.
Liquidity vanishes near expiry. The deferred months were busy; the expiring month was not.
Know what your product holds. Retail products that track futures may not roll when you think they do.
Settlement windows are short. A price set in two minutes of trading can be very different from the rest of the day.

The short version

On April 20, 2020, the May WTI crude oil futures contract settled at -$37.63 a barrel because it required delivery at Cushing, Oklahoma, where storage was nearly full, and traders who could not take delivery had to pay others to take the obligation in the last hours before the settlement window. Open interest was unusually high for the second-to-last day, liquidity had been thinning for weeks, and the price fell from zero to -$40.32 in about 20 minutes. Other contract months stayed positive, and the May contract expired the next day at $10.01. The CFTC’s interim staff report documents these factors without naming a root cause. Retail traders at unprepared brokers and investors in a Chinese bank’s oil product took some of the largest losses.