Negative Oil Prices are Rare, But Not Impossible

How bad is too bad for oil markets? As prices barrel toward the lowest levels since the start of the century, negative prices have re-entered the realm of possibility.

U.S. oil futures just hit an 18-year low as an oil-price war between Saudi Arabia and Russia rages on, and that has a few traders and analysts wondering whether physical crude prices — in at least some parts of Canada and the shale patch — could actually drop below zero. It’s a rare but not impossible feat.

Case in point: In the aftermath of the last major downturn four years ago, a North Dakota sour crude was briefly priced at negative 50 cents a barrel before being revised to a mere $1.50.

Mizuho’s Paul Sankey warned of negative crude prices in a note, pointing out that the capacity to hold barrels of U.S. oil in tanks and caverns could max out by the middle of the year. With nowhere to store, barrels could get backed up across the entire supply chain, he said.

It’s not clear exactly how an oil trade would work in a negative price scenario. In U.S. natural gas markets — which have been plagued by negative prices because of a dearth of pipeline space — producers have actually paid others to take their product. In electricity markets — especially in California where power drops below zero on a regular basis because of excess solar — negative pricing has turned into more of a real-time signal to generators to dial down plants.

“Anything is possible in commodities,” said Francisco Blanch, head of global commodities and derivatives research at Bank of America. “We know zero is not a lower band — we learned that with gas.”


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