Historically crude futures contracts had a lower bound of $0. On April 9th of this year the CME group released the following notice. https://www.cmegroup.com/content/dam/cmegroup/notices/clearing/2020/04/Chadv20-152.pdf.?mod=article_inline It states that if any oil futures contract settles below $8 it will immediately be switched to pricing model that supports negative prices. At noon on April 20th the May oil contract dipped below $8 which must have triggered this new pricing structure. It hit zero just two hours later and then quickly sold off to negative 40 in the next 30 min. According to this notice Gasoline and Diesel also have similar trigger prices that will allow them to have negative pricing.
Interesting, thanks for the research. My wagering partner told me on the 15th that he heard rumors about COMEX updating their software to accommodate negative oil prices. James Hamilton has a good plain language explanation. The anchor for the system is the fact that the buyer has the right to receive physical delivery if they choose to hold the contract to expiry, and could plan to put the oil into storage or ship it immediately into another pipeline. If I can store the oil in Cushing for a cost of a few dollars a barrel, that’s a valid option. But the higher the cost of storage, the bigger problem I’ll have on my hands if I actually take physical delivery. ...The bigger picture is that the flow of oil headed for delivery to Cushing in May was bigger than the consumption in May, and there was no easy way to store the surplus. That caught buyers of the May futures contract in a squeeze, unable to close their positions at the terms they expected. The situation will be helped some as upstream producers shut down. But the bigger problem is that demand for oil has collapsed. People aren’t flying in planes and they’re not driving to work.A month ago there were around a half million such contracts outstanding, promising delivery of half a billion barrels of oil to Cushing in May. That’s far more than could ever be physically delivered, and it’s perfectly normal. In the vast majority of those contracts, the buyer had no intention of receiving oil and the seller had no intention of delivering oil. The plan of the buyer was to sell the contract to somebody else before time for delivery, and enjoy the gain if they sell for more than they bought. The seller likewise planned later to buy a contract; in effect, their original offer was a short sale, which they later cover by buying. You can think of the second contract that closes each individual’s initial position as between the same two parties as the original contract, so that the two trades exactly cancel. For most of the original contracts, no oil actually changes hands in May.