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By Laila Kearney
(Reuters) - The price of a barrel of benchmark U.S. oil plunged below $0 a barrel on Monday for the first time in history, a troubling sign of an unprecedented global energy glut as the coronavirus pandemic halts travel and curbs economic activity.
The contract for West Texas intermediate crude, or WTI, is the benchmark for U.S. crude oil prices. On Monday, it looked like this:
https://fingfx.thomsonreuters.com/gfx/mkt/xklvyyygvgd/Pasted%20image%201587417553895.png
Such a steep drop in the oil benchmark prompted strong reactions beyond trading floors.
Here is an explanation of what negative crude prices mean in the real world:
WHAT DOES A NEGATIVE FUTURES PRICE MEAN?
The price of a barrel of crude varies based on factors such as supply, demand and quality. Supply of fuel has been far above demand since the coronavirus forced billions of people to stop traveling.
Because of oversupply, storage tanks for WTI are becoming so full it is difficult to find space. The U.S. Energy Information Administration said last week that storage at Cushing, Oklahoma, the heart of the U.S. pipeline network, was about 72% full as of April 10.
"There's no available storage anymore so the price of the commodity is effectively worthless," said Bob Yawger, director of futures at Mizuho in New York. "So when it's minus a dollar, they'll pay you a dollar to get it out of there."
The price plunge was partly due to the way oil is traded. A futures contract is for 1,000 barrels of crude, delivered into Cushing, where energy companies own storage tanks with roughly 76 million barrels of capacity.
Each contract trades for a month, with the May contract due to expire on Tuesday. Investors holding May contracts didn't want to take delivery of the oil and incur storage costs, and in the end had to pay people to take it off their hands.
The June contract, with delivery a month away, is still trading at above $20 a barrel, but the price crash indicates that most storage space has been gobbled up.
WHAT DOES THIS MEAN FOR CONSUMERS?
The crash in crude futures prices at Cushing won't necessarily translate into a crash in prices at the gas pump, said Tom Kloza, a veteran analyst with Oil Price Information Services.
"I think it's more inside baseball," Kloza said. "We'll continue to see gasoline prices, diesel prices and jet fuel prices drift lower into May but one shouldn't conclude that we're going to see fuel given away or that we're going to match these incredible, unprecedented drops we saw in crude oil today," Kloza said.