The anomaly of oil: How sellers ended up paying for the commodity

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US oil prices crashed to below zero for the first time as demand for the commodity collapsed in the wake of the coronavirus pandemic.

The price on the futures contract for West Texas Intermediate (WTI) fell to -$37.63 a barrel, a one-day drop of $55.90, or 306 percent, according to Dow Jones Market Data.

However, the price on the June futures contract settled at $20.43 per barrel on April 21, underscoring just how acute the concerns over physical storage of oil is.

Let's take a look at how oil, once considered the crown jewel of commodities, slipped into oblivion.

Also read: What does the fall in oil prices mean for Indian equities

Coronavirus outbreak

The early effects of the coronavirus outbreak on oil were first seen in China. The country, which accounted for more than 80 percent of global oil demand growth last year, was forced into lockdown in early February, constricting travel and broader economic activity.

"The coronavirus crisis is affecting a wide range of energy markets – including coal, gas and renewables – but its impact on oil markets is particularly severe because it is stopping people and goods from moving around, dealing a heavy blow to demand for transport fuels," International Energy Agency (IEA) said in a note in March.

At the time, the Paris-based agency had expected a 90,000-barrel a day shortfall in global oil demand for 2020, a sharp downgrade from its forecast in February, which predicted demand would grow by 825,000 barrels a day in 2020.

The IEA now expects global oil demand to fall by a record 9.3 million barrels a day this year, highlighting the true impact of the pandemic on what was once a prized commodity.

OPEC-Russia price war

In March, a petroleum price war ensued following the dramatic collapse of an alliance between Russia and the OPEC cartel, a pact that had underpinned world oil markets for three years.

In a meeting on March 6, Saudi proposed production cuts to prop up prices in a bid to revive demand ravaged by the pandemic. Russia refused and in retaliation Saudi Arabia, reversed course, and further opened its oil taps.

The Mexican standoff between The Kingdom and the Russians wiped off more than 50 percent of oil's value, sending shockwaves across the financial world.

Production cuts

As demand remained capped and the pandemic ensued, industry experts estimated it could knock out a third of global oil demand. This posed a serious threat to millions of jobs, especially, in oil-dependent countries making the truce between OPEC and Russia imperative.

After weeks of deliberations, in early April, OPEC, Russia and other oil-producing nations reached a deal, which would result in a 10 percent (or 10 million barrels a day) cut in global  output, effectively putting an end to the devastating price war that brought the energy industry to its knees.

'Fill it to the brim'

In a bid to arrest the rock-bottom prices, US President Donald Trump on April 20 said the country was planning to buy 75 million barrels to replenish the national strategic stockpile.

“We are filling up our national petroleum reserves... You know, the strategic reserves. And we are looking to put as much as 75 million barrels into the reserves themselves,” Trump said at a press conference.

This is not the first Trump called on the US Energy Department to buy more oil. However, the problem is storage. There is so much unused oil sloshing around that American energy companies have run out of room to store it.

'People are concerned that we are going to see so much build-up of inventory that it’s going to be very difficult to fix in the near term and there is going to be a lot distressed cargoes on the market. People are trying to get rid of the oil and there are no buyers," Michael Lynch, president of Strategic Energy & Economic Research Inc told the New York Times.

This has created an anomaly where the seller has to pay the buyer, as there is no place to put the oil and no one wants a crude contract that is about to come due.