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What Kind of Asset Is Crude Oil — WTI, Brent, and Historic Swings

Can the price of oil go negative? In April 2020, the price of crude oil actually hit minus $37 per barrel. On that day, when sellers had to pay buyers to take it, what happened?

WTI and Brent: two benchmark prices

When the news talks about oil prices, two names come up often: 'WTI' and 'Brent.' Both are representative benchmarks for the price of crude oil.

WTI (West Texas Intermediate) is the U.S. benchmark. It is delivered at an inland hub called Cushing, Oklahoma, and is transported mainly by pipeline.

Brent is the world's benchmark spanning Europe, Africa, and the Middle East; about two-thirds of global crude trading uses this price. It comes from the North Sea and is transported by tanker (ship).

Both are high-quality crude that is light and low in sulfur (light sweet), but because their origins and transport methods differ, their prices spread apart slightly. This difference is called the 'Brent-WTI spread.'

2008: from $147 to $30

Crude oil is famous for extreme volatility even among assets. A representative event is 2008.

On July 11, 2008, the WTI oil price surged to about $147 per barrel, an all-time high. Oil, which had been around $90 at the start of that year, had soared within half a year.

But then the global financial crisis erupted, oil demand plunged, and the price crashed to about $32 that December. It plunged about 80% from its peak in half a year.

A drawdown hard to imagine in stocks actually happens in commodities. It was a case that showed how sensitive crude oil is to the economy and sentiment.

The peak of $147 (July 2008) and the trough of about $32 (December 2008) are figures cross-confirmed in various sources (World Bank, Brookings, etc.). The decimals may differ slightly by day and by reference basis.

2020: the first-ever negative oil price

And on April 20, 2020, something that had never happened in history occurred. The price of the May-delivery WTI futures contract closed at about minus $37 per barrel (precisely about -$37.63). It fell about $56 in a single day.

The cause was this. As COVID halted people's movement, oil demand collapsed, while supply was overflowing. Storage space (especially at Cushing) was nearly full, and the May futures happened to expire the very next day, creating a situation where 'you have to take physical delivery but have nowhere to put it.'

In the end, those holding contracts reached the point of 'I'll pay you money, so please just take the oil.' On the same day, Brent, which could be moved by tanker, was about $26 and avoided going negative; this difference shows the importance of storage and transport structure.

The negative oil price was the result of special circumstances—futures, storage, and expiration—coinciding. Source: U.S. EIA, CFTC reports. Actual gas-station fuel prices did not become free.

Things to remember when viewing crude oil as an asset

Crude oil is an essential fuel of the global economy, but it is a tricky asset for an individual to invest in.

First, volatility is extreme. As we saw above, it can be -80% in half a year, or the price can even go negative.

Second, there are no dividends or interest. It does not grow on its own no matter how long you hold it.

Third, because you mostly invest through futures, roll cost (the cost incurred when switching to the next month's contract) can eat into your returns. This is exactly why, right after the 2020 negative oil price, crude oil ETFs went through large losses and structural changes.

Crude oil is an asset with a complicated risk structure that is dangerous to approach with the simple thought 'oil prices seem likely to rise.'

常见问题

Q. If the oil price is negative, do I get paid to buy oil?

No. What went negative was the price of the 'futures contract' for a specific expiration, not the gas-station fuel price. It was a special phenomenon that occurred when contract holders, unwilling to take physical delivery with no storage space and expiration imminent, sold while accepting a loss. Ordinary consumers did not receive oil for free.

Q. If I buy a crude oil ETF, do I earn as much as the oil price?

Not necessarily. Most crude oil ETFs are operated with futures, so roll cost arises. In a contango situation, even if oil prices rise, the ETF's return can be less than that—or in severe cases, you can lose money. In fact, during the 2020 oil-price upheaval, several crude oil ETFs went through large losses and structural changes.