On April 20, 2020, the price of West Texas Intermediate crude oil dropped to a historic low of negative $37 per barrel. This unprecedented price of oil is an extreme example of a commodity trading circumstance known as a “contango.” A contango occurs when the future’s price of a commodity such as oil is higher than the “spot price” of the commodity at present. The April 2020 contango resulted from at least three factors:
- April 20 was the last day for contracts to deliver oil during May 2020;
- the precipitous drop in global oil consumption as a result of the COVID-19 pandemic; and
- the lack of storage capacity for oil produced from North American wells.
The drop in global oil consumption is easy to understand. And with no place to store excess oil, producers of oil needed to pay someone to take it off their hands. But the lack of storage capacity raises a big question. Where does all that North American oil go?
Most North American oil is stored in a small town in central Oklahoma. Cushing, Oklahoma bills itself as the “Pipeline Crossroads of the World.” Pipelines from west Texas, southeast New Mexico, Wyoming, Colorado, Illinois, across Oklahoma and as far away as Alberta, Canada, all terminate in Cushing. In order to accommodate all of those pipelines, the crude oil tanks around Cushing have approximately 91 million barrels of storage capacity. So much oil flows through Cushing that it has been designated as the delivery and pricing point for West Texas Intermediate crude oil since 1983.
Cushing is not the only place for storage of North American crude oil. A significant portion of North American oil ends up in the oil terminal located in a town in southern Illinois; Patoka. The Patoka Oil Terminal has capacity for up to 19 million barrels of oil and is the terminus for five major pipelines, including the Dakota Access Pipeline.
Global demand for oil has recovered enough to push the price West Texas Intermediate back into the positive range. Whether that demand prevents an overflow of the capacity at Cushing and Patoka remains an open question.