As the night wore on, A\u2019Xiang began preparing to lose it all. At 10 p.m. in Shenzhen — 10 a.m. in New York — she checked her phone one last time before heading to bed. The price was now $11. Half their savings had been wiped out.<\/p>\n\n\n\n
As the couple slept, the rout deepened. The price set new low after new low in rapid-fire succession: the lowest since the Asian financial crisis of the 1990s, the lowest since the oil crises of the 1970s, the first time ever below zero.<\/p>\n\n\n\n
And then, in a 20-minute span that ranks among the most extraordinary in the history of financial markets, the price cratered to a level that few, if any, thought conceivable. Around the world, Saudi princes and Texan wildcatters and Russian oligarchs looked on with horror as the world\u2019s most important commodity closed the trading day at a price of minus $37.63. That\u2019s what you\u2019d have to pay someone to take a barrel off your hands.<\/p>\n\n\n\n
Many things about the explosive, flash-crash-like nature of the sell-off are still not fully understood, including how big a role the Crude Oil Treasure fund played as it sought to get out of the May contracts hours before they expired (and which other investors found themselves in the same position). What is clear, though, is that the day marked the culmination of the oil market\u2019s most devastating crisis in a generation, the result of demand drying up<\/a> as governments around the world locked down their economies in an attempt to manage the coronavirus pandemic.<\/p>\n\n\n\n For the petroleum industry, it was a grimly symbolic moment: The fossil fuel that helped to build the modern world, so prized it became known as \u201cblack gold,\u201d was now not an asset but a liability.<\/p>\n\n\n\n \u201cIt was mind-bending,\u201d said Keith Kelly, a managing director at the energy group of Compagnie Financiere Tradition SA, a leading broker. \u201cAre you seeing what you think you\u2019re seeing? Are your eyes playing tricks on you?\u201d<\/p>\n\n\n\n While the deeply negative prices of that Monday were largely limited to the U.S., and in particular the soon-to-expire WTI contract for May delivery, the world felt the shockwaves, with ripple effects dragging global prices<\/a> to the lowest since the late 1990s.<\/p>\n\n\n\n Traders are still piecing together the confluence of factors that led to the collapse. And regulators are scrutinizing the issue, according to people familiar with the matter.<\/p>\n\n\n\n For small-time investors in Asia like A\u2019Xiang who bet enthusiastically on oil, though, it has been a reckoning.<\/p>\n\n\n\n She awoke to a text at 6 a.m. from Bank of China informing her that not only had their savings been lost but that she and her boyfriend may actually owe money.<\/p>\n\n\n\n \u201cWhen we saw the oil price start plunging, we were prepared that our money may be all gone,\u201d she said. They hadn\u2019t understood, she said, what they were getting into. \u201cIt didn\u2019t occur to us that we had to pay attention to the overseas futures price and the whole concept of contract rolling.\u201d<\/p>\n\n\n\n In all, there were some 3,700 retail investors in Bank of China\u2019s Crude Oil Treasure fund. Collectively, they lost<\/a> $85 million.<\/p>\n\n\n\n Soon, events would catch up with mom-and-pop American investors who had made much the same bet as A\u2019Xiang — that oil had to go back up — by buying the United States Oil Fund, an exchange-traded fund known as USO.<\/p>\n\n\n\n That fund, into which investors poured<\/a> $1.6 billion the previous week, hadn\u2019t been holding the May WTI contract on Monday. But the rout sparked a chain reaction in the market that burned these investors, too.<\/p>\n\n\n\n The day\u2019s events were set in motion more than two weeks earlier, with the pandemic shattering economies and stalling demand for oil: flights were grounded; traffic jams disappeared; factories ground to a halt.<\/p>\n\n\n\n The below-zero price scenario was, in some corners of the market, starting to be considered. On April 8, a Wednesday, CME Group Inc, which owns the oil-futures exchange, advised<\/a> clients that it was \u201cready to handle the situation of negative underlying prices in major energy contracts.\u201d<\/p>\n\n\n\n That weekend, producing nations led by Saudi Arabia and Russia finalized their response to the crisis: a deal<\/a> to slash production by 9.7 million barrels a day, amounting to a tenth of global production. That wouldn\u2019t be nearly enough. Refineries started shutting down. Buyers for cargoes of oil for immediate delivery in physical markets disappeared<\/a>.<\/p>\n\n\n\n Futures prices remained, for a while, relatively steady.<\/p>\n\n\n\n That was in part thanks to folks like A\u2019Xiang. In China, investors large and small were betting on higher commodity prices, believing the world would overcome the virus and that demand would bounce back. Bank of China branches posted ads on Wechat, showing an image of golden barrels of oil under the title \u201cCrude oil is cheaper than water\u201d.<\/p>\n\n\n\n Yet on April 15, CME offered<\/a> clients the ability to test their systems to prepare for negativity. That\u2019s when the market really woke up to the idea that this could actually happen, said Clay Davis, a principal at Verano Energy Trading LP in Houston.<\/p>\n\n\n\n \u201cThat\u2019s when the dam broke,\u201d he said.<\/p>\n\n\n\n By the time Monday April 20 rolled around, most ETFs and other investment products — though not the Crude Oil Treasure fund — had shifted their position out of the May WTI contract into the next month.<\/p>\n\n\n\n Futures contracts are settled by physical delivery, and if you happen to get stuck with one when it expires, you become the owner of 1,000 barrels of crude. Rarely does it come to that.<\/p>\n\n\n\n But now it was.<\/p>\n\n\n\n The physical settlement for the benchmark WTI takes place at Cushing, Oklahoma. When storage tanks there fill up, the price on the expiring contract can plunge and become disconnected from the global market. With demand evaporating, inventories at Cushing were soaring. In March and April, they climbed 60% to just under 60 million barrels, out of a total working capacity of 76 million \u2013- and analysts reckon much of the remaining space is already earmarked.<\/p>\n\n\n\n So on the crucial Monday, the penultimate day of trading in the May WTI contract, there were precious few traders able or willing to take physical delivery.<\/p>\n\n\n\n Much of the market was focused then on the settlement price, determined at 2:30 p.m. in New York. Investment products \u2013- including Bank of China\u2019s \u2013- typically seek to achieve the settlement price. That often involves so called trading-at-settlement contracts, which allow oil traders to buy or sell contracts ahead of time for whatever the settlement price happens to be.<\/p>\n\n\n\n On that afternoon, with trading volumes thin and sellers outnumbering buyers, the trading-at-settlement contracts quickly moved to the maximum discount allowed, of 10 cents per barrel. For a period of around an hour, from 1:12 p.m. until 2:17 p.m., trading in these contracts all but dried up. There were no buyers.<\/p>\n\n\n\n The result was the carnage of that afternoon. At 2:08 p.m., WTI turned negative. And then, minutes later, sank to as low as minus $40.32 before rebounding slightly at the close.<\/p>\n\n\n\n \u201cThe trading at settlement mechanism failed,\u201d said David Greenberg, president of Sterling Commodities and a former member of the board at Nymex. \u201cIt shows the fragility of the WTI market, which is not as big as people think.\u201d<\/p>\n\n\n\n Prices in the U.S. physical market, set by reference to the WTI settlement, also plunged<\/a>, with some refiners and pipeline companies posting prices to their suppliers as low as minus $54 a barrel.<\/p>\n\n\n\n Bank of China\u2019s investment product offers an explanation of why the move below zero was so dangerous. The bank had demanded investors like A\u2019Xiang put up the entire cost of what they were buying in advance. That meant the bank\u2019s position looked risk-free.<\/p>\n\n\n\n But not if prices dropped below zero: then there wouldn\u2019t be enough money in the investors\u2019 accounts to cover the losses.<\/p>\n\n\n\n The bank had a total position of about 1.4 million barrels of oil, or 1,400 contracts, according to a person familiar with the matter. It wound up having to pay about 400 million yuan ($56 million) to settle the contracts.<\/p>\n\n\n\n Across the investing world, others were faced with similar risks<\/a>. ETFs could be bankrupted if the price of the contracts they held went below zero. Facing that possibility, they shifted<\/a> a large chunk of holdings into later delivery months. Some brokers barred<\/a> clients from opening new positions in the June contract.<\/p>\n\n\n\n The moves amounted to a new wave of selling that swept across oil markets. On Tuesday, the June WTI contract plunged by 68% to a low of just $6.50. And this time it was not limited to U.S. contracts: Brent futures also plunged, hitting a 20-year low of $15.98 on Wednesday, driving the price of Russian, Middle Eastern and West African oil that is priced relative to it to levels near zero.<\/p>\n\n\n\n![\"Gas](\"https:\/\/assets.bwbx.io\/images\/users\/iqjWHBFdfxIU\/i_4bmHsco92o\/v0\/60x-1.jpg\")
U.S. ETF Pain<\/h3>\n\n\n\n
![\"May](\"https:\/\/assets.bwbx.io\/images\/users\/iqjWHBFdfxIU\/iTrEwdzqsrWc\/v2\/pidjEfPlU1QWZop3vfGKsrX.ke8XuWirGYh1PKgEw44kE\/60x-1.png\")
<\/figure>\n\n\n\nPhysical Delivery<\/h3>\n\n\n\n
![\"Views](\"https:\/\/assets.bwbx.io\/images\/users\/iqjWHBFdfxIU\/igngyic7uAz0\/v0\/60x-1.jpg\")
No Buyers<\/h3>\n\n\n\n
![\"Industry](\"https:\/\/assets.bwbx.io\/images\/users\/iqjWHBFdfxIU\/i0mIUno1zJwQ\/v0\/60x-1.jpg\")
CFTC\u2019s Top Priority<\/h3>\n\n\n\n