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Did the Price of Oil Fall to 0?

If you were looking at websites like cnbc.com, you would have thought the world was coming to an end. They were making the broad-based claim that oil was trading below 0 and was negatively priced. Technically yes - however, realistically no. The price of oil is determined by option contracts that are exchanged between options traders. The contracts are a month at a time, and some point the option contract for that month expires. The May contract had dropped 100% plus percentage points on Monday, taking the May contract well below the price of 0 per barrel of oil. The May contract is due to expire today.


At some point during the month, the current contract becomes meaningless (regarding the price of oil - not the traders who hold the deal), and the next month's option contract is in focus. The June contract was trading at 20 and change per barrel of oil. The only people that the negative price of oil per barrel affected were the option traders who were on the wrong side of the May contract.

Having said that, as I write, the June contract is already down -30% this morning. There is an unprecedented supply of oil due to weakened demand. It is so bad that there is limited capacity to hold oil that is still coming in due to production. Now, if June's contract goes to 0, we have a horrific problem. This was the first time in history that an options contract in oil was priced below 0.