Journal of Critical Infrastructure Policy
market . 7 However , before these production cuts ( the largest in history ) could kick in , yet another unprecedented event would occur : negative oil prices at a pricing benchmark .
Compared to electricity and natural gas , oil is relatively easy and cheap to store . During busts , excess oil production is stored in land terminals and sometimes on floating tankers . When markets are in contango , meaning future prices are higher than present prices , storage entities can lock-in profits for stored oil with financial contracts . 8 Part of a healthy market system , this pricing structure facilitates the balancing of global oil markets . As global oil demand collapsed due to pandemic response measures , contango in futures contracts formed to encourage the storage of the entire surplus . Nevertheless , the sheer amount of oil needing to go into storage , as much as 600 million barrels in April alone , raised questions about whether there would be sufficient storage . 9 If there is no demand and no place to store oil , oil supply needs to be shut off at the well head , a costly process that can damage both the well and future oil production .
However , the severity and rapidity at which the pandemic impacted oil markets posed the risk of outpacing the ability of oil storage to handle the excess . In mid-April , oil next-month futures for delivery at the US benchmark hub in Cushing , Oklahoma suddenly crashed to $ 37 / barrel . 10 With demand moribund , the ability of landlocked Cushing to store any more oil was in question . Effectively , holders of future contracts obligating acceptance of delivery were paying anyone that would take their oil delivery . The amount of physical oil traded at this level was limited , because many producers had already locked in deliveries . Nevertheless , subsequent chaos in long-dated delivery months , attributed to financial firms shifting their exposure from the front-month , raises questions about the degree to which oil financial speculation can unduly impact markets at times of severe stress . 11
Natural Gas Market
As oil and natural gas are often produced from the same well , natural gas markets are closely tied to oil markets . The physical nature of natural gas makes storage
7 Krauss , C . “ Oil Nations , Prodded by Trump , Reach Deal to Slash Production .” New York Times , April 2020 . https :// www . nytimes . com / 2020 / 04 / 12 / business / energy-environment / opec-russia-sau di-arabia-oil-coronavirus . html
8 Regli , F ., & Adland , R . “ Crude oil contango arbitrage and the floating storage decision .” Transportation Research E : Logistics and Transportation Review 122 , pp . 100-118 , February 2019 . https :// www . sciencedirect . com / science / article / pii / S1366554518304885
9 Jaffe , A . M . “ Oil Ground Zero : Running Out of Storage .” April 2020 . https :// www . cfr . org / blog / oilground-zero-running-out-storage
10 Gilbert , A . “ Oil prices are negative : What does it mean and what comes next ?” April 2020 . https :// www . fastcompany . com / 90493860 / oil-prices-are-negative-what-does-it-mean-and-what-comesnext
11 Einloth , J . “ Speculation and Recent Volatility in the Price of Oil .” FDIC : CFR , August 2009 . https :// www . fdic . gov / bank / analytical / cfr / 2009 / wp2009 / 2009-08 . pdf
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