Why an Oil Futures Contract Could Trade at a Negative Price

Summary

The document explains that the widely reported negative oil price concerned the expiring front-month WTI futures contract in April 2020, rather than a general price for all oil. Traders facing the prospect of physical delivery were closing or transferring positions near the contract’s last trading date. Under severe demand decline and limited storage capacity, avoiding delivery became especially urgent and helped push the contract price below zero.

A negative futures price can mean that a buyer is paid to take the delivery obligation, but receiving physical oil is not costless: transport and storage still have to be arranged and paid for. The answer also notes that futures prices normally reflect carrying costs of the underlying. The episode illustrates how contract expiry, delivery mechanics, storage constraints, and weak demand can interact. It describes a specific market event, not a claim that every oil contract or physical transaction can be acquired on the same terms.

Key ideas

• The negative price episode involved the expiring front WTI futures contract in April 2020.
• Traders sought to exit positions to avoid taking physical delivery.
• Falling oil demand and constrained storage amplified pressure near expiry.
• A buyer paid to accept oil may still face transport and storage costs.
• Futures pricing generally reflects the cost of carrying the underlying asset.

Tags

# Negative price of oil


# Negative price of oil












Yesterday and today, some kinds of oil have been traded for negative prices.

Does it mean that I can take oil from seller and at the same time I get money? Or is the negative price connected only with derivatives and not physical delivery?

## Answer by David Duarte (score 23, accepted)

https://quant.stackexchange.com/a/53491

The negative price that was all over the news was the front contract for WTI (West Texas Intermediate) futures that went to -40 and had a last trade date of 21.04.2020, so today.

This movement was connected to derivatives and among other explanations was the fact that traders were exiting positions in order to avoid the risk of taking delivery of physical oil barrels.

This kind of movement is common on roll dates but was highly exaggerated in the current context of sharply diminishing demand for oil and shortage of world storage.

So yes, you get paid to take oil off the hands of the seller, but bear in mind you will have to incur in transport and storage costs, and derivative prices normally reflect the cost of carry of the underlying asset.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.