Cushing Storage Limits and Negative Oil Prices
WTI futures settle by physical delivery into storage tanks at Cushing, Oklahoma, and when those tanks run out of room, holders of expiring contracts have paid buyers to take the oil off their hands rather than store it themselves.
Prerequisites: Crude Oil Benchmarks: WTI, Brent and Dubai, Contract Specifications and Delivery
In April 2020, the front-month WTI crude oil futures contract settled at -$37.63 a barrel. Sellers were paying buyers to take oil away. This wasn't a market malfunction so much as a very literal consequence of how WTI futures are built: the contract requires physical delivery into storage tanks at Cushing, Oklahoma, and when those tanks are essentially full, whoever is still long a contract at expiry has nowhere to put the oil they're about to be forced to accept.
WTI futures don't cash-settle — the long who holds the contract to expiry must take delivery of physical barrels at Cushing. If storage there is nearly full and no one wants (or is able) to take barrels, the contract's price can fall below zero, because a trader without storage would rather pay to exit the position than be forced to accept oil it has nowhere to put.
Why storage capacity, not demand for oil, set the price
Cushing is the delivery point for the WTI contract, and its tank farms have a hard physical capacity — commonly cited around 76 million barrels of working storage. Every barrel of WTI a trader is long when the contract expires either gets sold on, rolled into a later contract, or must be taken as physical delivery at Cushing. Normally this is routine: refiners and storage operators with contracted tank space happily take delivery, since they need the oil or can profit from storing it.
In April 2020, COVID-19 demand collapse meant almost nobody needed physical barrels, while production hadn't yet slowed to match. Cushing inventories climbed toward capacity, and contracted tank space became nearly impossible to lease at any price. Financial traders long the futures with no intention of ever taking delivery had to exit before expiry. With storage essentially gone, they weren't selling oil so much as selling the obligation to take oil nobody could store, and buyers of that obligation had to be paid to accept it.
Worked example
A hedge fund holds a long position of 100 WTI futures contracts (1,000 barrels each = 100,000 barrels) into the last trading day, with no storage arranged. Cushing tanks are at roughly 95% of capacity, and the little space left is leased at a premium price, if it's available at all. As settlement approaches, other longs in the same position are scrambling to sell simultaneously, and there are essentially no buyers who both want the oil and have somewhere to put it. The fund ends up needing to pay a counterparty to take the position: the contract trades hands at -$37.63/barrel, meaning the fund pays out $37.63 × 100,000 = $3,763,000 simply to avoid being forced to take delivery of oil it has no storage for.
What this means in practice
The episode is a standing reminder that futures prices are not a pure read on the value of a barrel of oil — they're the value of a specific delivery obligation at a specific location, which can become a liability rather than an asset when the physical infrastructure behind it is saturated. Exchanges now monitor storage utilization at delivery points closely, and funds without physical exposure are careful to roll out of expiring commodity futures well before the delivery window.
Negative oil prices didn't mean oil was worthless — plenty of oil elsewhere in the world, away from Cushing, still had a positive price. It meant the specific combination of "WTI futures contract, expiring imminently, no storage arranged" had gone negative, a distinction that matters enormously for anyone reasoning about what a futures price is actually measuring.
Further reading
- CME Group, 'Negative WTI Prices Explained' (April 2020)