Negative WTI Crude Futures Prices Event Study - Adam S. Nagy and Robert C. Merton - April 26, 2020

Oct 12, 2026

Uploaded by Fans

WTI Crude Oil futures and spot prices fell below zero for the first time in history on April 20, 2020. The paper reviews economic and market drivers behind negative crude prices, linking volatility to Covid-19 demand shocks and OPEC+ production disagreements. It analyzes how supply still exceeded demand despite announced cuts, how drilling activity declined, and how rapidly filling inventories—especially at Cushing—sent bearish signals. It then explains contract mechanics for CLK20 and why speculators unwound positions to avoid physical delivery.

LanguageEnglish

CategoryGeneral

FormatPDF

Pages5

Reading Time2 min

AccessFree to download

Abstract

Oil Markets Review Economic Background

Global crude production, consumption, and storage dynamics

Cushing stock build and price implications

So Why Did Prices Go Negative?

Contract mechanics and speculative unwinding

Negative WTI Crude Futures Prices Event Study Adam S. Nagy and Robert C. Merton April 26, 2020 1 Abstract WTI Crude Oil futures and spot prices went below zero for the ﬁrst time in history on Monday, April 20 . Since the sweet crude dived below zero to explore a previously unknown territory, many articles have attempted to explain the possible reasons behind this phenomenon. In this short article we are going to summarize some of the most relevant reports and provide our own analysis. 2 Oil Markets Review Economic Background The oil markets have been experiencing market turbulence for some time now. This market volatility is mostly a consequence of Covid-19, as the virus has had a severe impact on the world's economy. However, the oil markets also suﬀered from a disagreement within OPEC+ nations regarding production numbers, leading to increased production both in Russia and Saudi Arabia. The combination of these two factors have had a serious impact on the price of oil since the beginning of March. Last week, following a devastating, weeks-long price war, Russia and Saudi Arabia agreed to cut crude production by 9.7 million barrels per day, to combat the demand shock caused by the coronavirus pandemic. However even with the proposed production cut, supply continued to substantially exceed demand.1 Figure 1: Global Crude Production and Consumption 1 Here's What Negative Oil Prices Really Mean According to The International Energy Agency “There is no feasible agreement that could cut supply by enough to oﬀset such near-term demand losses.” 2 Per the agency's prediction, global oil production numbers will only marginally decrease while consumption rates are approximity ﬁfteen percent lower than at the beginning of the year, as illustrated on Figure 1. The number of drilling rigs in the United States and Canada have decreased from 1000 to less than 700 since early March, but some of these wells might stay closed even after the coronavirus is long gone. It is important to note that shutting down oil wells is not free and these wells can't be easily turned on or oﬀ depending on the market conditions. If a smaller well with low pressure is shut oﬀ, it might not be possible to reopen it at all, and even for bigger wells there are tremendous closing costs to shut oﬀ the well. So even with low oil prices, some producers prefer to keep pumping crude in hopes of rising oil prices in the future.3 As demand falls and supply stays steady with only a slight decrease in production, relative to the diminishing demand, oil storage facilities around the globe, and in the United States, are ﬁlling up. One of the most often referenced storage facilities in the US is Cushing, OK. Cushing is the physical delivery location for many oil futures contracts including the one that went negative on Monday. Since futures settle at Cushing, the inventory levels at this location are a good indicator of supply and demand dynamic in the oil markets. Figure 2: Cushing, OK Crude Stock as % of Capacity As illustrated on Figure 2 there has been an ongoing stock build at Cushing, which now operates over 75% capacity. This large increase in inventory, in addition to the expected excess oil in the near future, is a bearish signal sending both spot and near future prices to the lowest they have ever been. Figure 3: Cushing, OK Crude Stock & Spot Crude Price 2[https://www.iea.org/reports/oil-market-report-april-2020](https://www.iea.org/reports/oil-market-report-april-2020) 3[https://www.wsj.com/articles/we-pulled-the-plug-as-oil-prices-plunge-drillers-in-the-gulf-shut-off-wells-11587558182?](https://www.wsj.com/articles/we-pulled-the-plug-as-oil-prices-plunge-drillers-in-the-gulf-shut-off-wells-11587558182?)[ ](https://www.wsj.com/articles/we-pulled-the-plug-as-oil-prices-plunge-drillers-in-the-gulf-shut-off-wells-11587558182?)ns=prod/accounts-wsj On Monday April 20th, the spot price of oil has reached negative 37.63 USD at Cushing,

FAQs

What caused WTI crude prices to go negative on April 20, 2020?

The paper ties the event to collapsing demand from Covid-19 and continued supply exceeding demand despite production cuts, leading to severe inventory accumulation and storage pressure. It highlights Cushing stock builds as a key bearish signal.

Why is Cushing, OK important for WTI futures pricing?

Cushing is the physical delivery location for many oil futures contracts, so inventory levels there reflect supply-demand dynamics. The document shows Cushing operating over 75% capacity and notes ongoing stock builds as prices hit record lows.

How does the CLK20 May 2020 WTI futures contract affect traders’ behavior?

The contract is physically settled at Cushing for 1,000 barrels. Delivery rules and legal consequences for failing to take delivery push speculators to unwind positions before expiry to avoid physical delivery.

Oct 12, 2026

Uploaded by Fans