First and foremost, WTI is a futures contract that is delivered to Cushing, Oklahoma. Cushing is the hub for oil storage in the US and hence also the nexus for a series of pipelines that deliver oil from all over North America. The interesting thing about Cushing, at least for the purposes of our discussion, is that it is landlocked. 

In other words, it is very easy to get oil into Cushing, but almost impossible to export it. This means that available storage in Cushing is very dependent on domestic demand for crude oil. If demand for oil products, and hence crude, is weak, then more crude gets stuck in Cushing.

Not forgetting the supply side, the discovery and exploitation of the American shale patch has brought about a surge in domestic production; and these barrels of oil tended to end up in Cushing if they could not be easily brought to the export market.

Simply put, prior to Covid, the shale glut was already taking up a lot of space. Then came the double whammy of Covid and the Saudi production hike.

The Saudis decided to increase their production of crude in early March 2020, from 10mm barrels a day to 13mm barrels a day in order to combat the flood of oil supply from Russia and the American shale patch. Naturally, oil prices tanked. 

But their timing could not have been worse. Covid swept across the globe shortly after, leading to lockdowns all over the globe. Demand for crude oil and its products fell off a cliff overnight just as Saudi Arabia ramped up its production, causing a catastrophic fall in global crude prices.

Which brings us back to Cushing, which as you recall, was already flush with shale production. The demand shock from Covid meant that a lot more oil was being piped into Cushing than was being brought out. The delivery point quickly filled up, even as producers struggled with decisions to mothball production (shutting down production can cost more than continuing to produce, even at below breakeven per barrel prices).

All that oil, already pumped out of the ground, had to go somewhere; and it just so happened that the somewhere they had to go was landlocked. We know the rest by now, producers started paying other people to take the oil off their hands, but because buyers could not find storage, producers offered more and more to get buyers to buy; and WTI printed a low of -$40, and settled at $-37.

Although, is it still considered “buying” if someone is paying you to take it? 

At this point, it must be noted that 2020’s negative WTI episode was not a new phenomena to people involved in the shale market. North Dakota Sour traded below $0, although not by much, in 2016. The reasons then were broadly the same, too much production with no pipeline infrastructure to get the barrels to a broader domestic and/or export market.

What was shocking about WTI, however, was how famous it is. Prior to the American shale revolution, WTI was widely used as a global benchmark for pricing other similar grades of crude. While recent years have seen this role shift more towards Brent (due in part to the same oversupply of shale into landlocked Cushing factor), WTI very much remains in the mainstream consciousness; and seeing it trade so deeply negative made for great headlines if nothing else. 

Crazy times, but also somehow logical.