Updated March 5, 2025
How Can Oil Prices Go Negative? A Macro Investing Perspective Using Ray Dalio’s Principles
How Can Oil Prices Go Negative? A Macro Investing Perspective Using Ray Dalio’s Principles
How Can Oil Prices Go Negative? A Macro Investing Perspective Using Ray Dalio’s Principles
AJ Giannone, CFA
The Macroscope
“The stock market is never obvious. It is designed to fool most of the people, most of the time.” - Jesse Livermore
The prompt month of WTI crude oil collapsed below $0 in April 2020
A confluence of factors exacerbated volatility, offering opportunities for long-term investors
Ray Dalio’s framework and macro perspectives help us understand why it happened and that unexpected events will occur again
Markets do unprecedented things all the time. It’s a dangerous game to rely solely on historical trends and cycles when making asset allocation decisions. Case in point: West Texas Intermediate (WTI) crude oil in April of 2020. During the depths of the COVID-19 pandemic, the key energy commodity did the unthinkable—its price went negative. Traders panicked and computer algorithms went haywire. It was the first (and only) time WTI dropped below $0 since futures trading began in 1983.
The stunning event wasn’t confined to unease in the oil pits. Macro investors were once again reminded that there’s no sure thing in markets; even heavily traded assets and commodities can turn wonky when the global economy falls into a tailspin. With panic comes opportunity, however, and investors willing to stomach intense volatility by getting long stocks in the Energy sector were rewarded.
But what made oil—perhaps the world’s most important commodity—go negative? Could it happen again? What should investors do today to prepare? Let’s dive into the black gold trade and step back in time to early 2020.
WTI Crude Oil in 2020: Price Dives Negative on April 20
Source: TradingView
The Economic Machine: Supply, Demand, and Market Mechanics
Like most commodity markets, price dynamics rely on traditional supply and demand factors. Ray Dalio’s core investing principle is that the economy operates like a machine, driven by traders and transactions. You see, for every buyer, there’s a seller; the two set market prices based on their perceptions of supply/demand fundamentals. In the case of oil, the fundamentals were thrown wildly off balance in early 2020 due to a few factors:
Demand Shock
The global economy halted in mid-March 2020. COVID-19 had swept across the continents, and strict shelter-in-place orders resulted in hardly any travel and industrial activity. With airplanes grounded and factories shuttered, oil demand collapsed. After several weeks, the oil supply/demand balance essentially broke.
Supply Glut
All the while, the OPEC+ oil cartel (a group that wields significant influence over oil supply) failed to agree on needed production cuts. The already-swelled market turned even more oversupplied. Producers facing bankruptcy felt forced to keep pumping oil & gas to remain as going concerns—even at historically low prices. After a few weeks, oil simply had nowhere to go.
Storage Constraints
You are probably getting the picture. Too much oil, too little demand, and oil & gas companies producing to avoid going insolvent. In March and April of 2020, oil storage facilities—like those in Cushion, OK—quickly reached capacity. This is where physical commodities, such as WTI and Brent crude oil, trade differently than stocks and bonds. Commodities require storage, and if they are topped out, strange things can happen (we’ll get more into that later).
It doesn’t take a skilled hedge fund manager like Dalio to recognize an impending disaster in oil given this scenario. The delicate global macro landscape and upheaval triggered by the pandemic brought about disorder, and the years thereafter would be riddled with inflation that would have major geopolitical implications.
At Allio, we believe investors can spot these turning points by analyzing macroeconomic variables and identifying trends. Our Macro Dashboard is a comprehensive view of the market’s opportunities in a big picture. You can view real-time market indicators, economic calendars, interactive historical charts, daily market summaries, and ETF and equity insights from our team of portfolio experts.
Futures Market Mechanics: The Key to Negative Prices
With an understanding of the supply/demand situation during COVID-19, imagine you are an energy trader in April 2020. You see oil prices fall below zero on your screen in a highly volatile and fear-driven market. Many investors thought, “So, why not be paid to take oil, store it, then sell it later on when the market normalizes?” This was absolutely a discussion had across energy trading floors across North America back then. The problem was that storage was hard to come by—even if you were paid to buy the physical commodity.
It’s also important to understand how futures contracts work—they are agreements to buy or sell a commodity at a predetermined price and date. Additionally, most oil traders don’t actually take physical delivery of barrels of WTI. Rather, they trade futures contracts from a financial standpoint and “roll them over” to later-dated contracts months before “the prompt month” settles and expires.
Throughout the COVID year, oil futures markets were in what’s known as a “contango” term structure. That’s a lot of jargon simply to describe that near-term oil contracts (the prompt month and contracts just a few months out on the curve) were much cheaper than longer-dated contracts. So, the rationale for taking physical delivery was that you could just hold the oil and then sell it, say, six months down the road for $30 or more per barrel. It wasn’t so simple, however. A contango market is quite bearish, and as the long-dated contracts come closer into view, they often decline in price. In the opposite situation, a “backwardated” oil curve reflects bullish fundamentals of high demand and tight supply.
On that fateful afternoon of April 20, 2020, the May contract was the prompt month. Oil traders faced a dire situation never before experienced:
Storage was nearly full, meaning anyone holding contracts upon expiration would have to physically take delivery with nowhere to put the oil.
Since few market participants take delivery, desperation grew to offload contracts, and the selling pressure was made worse by speculators—this was arguably the first “meme trading” event that would portend GameStop the following January and crypto altcoins years later
The result? Fearing the costs and logistical nightmare of taking physical delivery of oil during societal lockdowns and with storage facilities filled to the brim, traders long May oil futures were willing to pay others to take the oil off their hands, leading to negative prices.
From Dalio’s macro perspective, this is a classic example of how financial markets, not just economic fundamentals, drive short-term price action. It brought about a new reality that market cycles can turn so extreme that never-before-seen situations can come about quickly.
In the case of WTI on April 20, 2020, the May contract began the session near $15 per barrel and then drifted down toward $10 by mid-day. By 1 p.m. ET, the financial media was centered on oil as it neared the $0 mark. An hour later, the dams broke, and WTI didn’t just drift into negative territory—it plunged. -$1, -$5, -$20, -$40 happened sequentially in minutes.
Credit and Leverage: How Debt, Hubris, and Macro Risks Exacerbated Market Moves
The Bridgewater founder’s principles focus on the risks of an overleveraged financial system and the misuse of debt by speculators; Dalio’s Big Cycle is a theory that describes long-term macro power shifts. The same notions and determinants that perpetuate the Big Cycle apply to case studies like negative oil prices in April 2020.
Dalio's theory includes five big forces that contribute to the Big Cycle:
The Big Cycle of money/credit/debt
The Big Cycle of internal peace and conflict
The Big Cycle of external peace and wars
The Big Cycle of nature
The Big Cycle of technological developments
Oil markets in early 2020 were rocked by excess available money with no physical storage available. In years past, there may have been fewer speculative players in the market, but technology made it so that anyone with a futures trading account could participate in the volatility by 2020. ETFs, like the United States Oil Fund (USO), were another way for retail investors to take part. As always with both WTI and Brent oil, geopolitical actors, such as OPEC+, drive both near- and long-term trends.
Oil companies are partly responsible for WTI settling at -$37.63 on April 20, 2020, too. Producers and refiners have capital structures that include significant amounts of debt. Negative prompt-month prices were not planned for, so as the price gradually dipped in early 2020, they just kept drilling, hoping that a “volume over price” operating model would sustain them through the bear market in commodities. But share prices within the Energy sector, along with the broader market, were tanking by March. The Energy Select Sector SPDR ETF (XLE) dropped from $50 to $18 per share in the year’s first 54 trading days. As equity value fell, debt’s share of the sector’s collective capital structure grew in relative size, exacerbating risks for investors and firm executives.
Bigger picture, for years the oil market operated on the assumption of stable or growing demand. Producers invested heavily in infrastructure without accounting for extreme scenarios like a global pandemic. Many industries, not just oil & gas, gradually adopted a “just-in-time" mindset regarding supply chains and production. When the macro economy was disrupted, the fragility of such a logistical strategy was revealed, and harshly so.
Another geopolitical trend that hit its zenith right before the China Virus went ‘round the world was the ESG movement. At the center of ESG was an undue focus on environmental considerations. Greenwashing made investing at all costs in wind, solar, and other renewable energy the priority. The problem is that it left traditional oil & gas planning an afterthought. Moreover, renewable energy is intermittent and not as reliable as traditional fuels for power generation. This farce of a paradigm shift may have contributed to a more delicate energy market.
Dalio’s principles were on full display. Among them, is the reality that debt amplifies market movements. When oil prices fall, leveraged players in the energy space are forced to sell WTI contracts, accelerating declines beyond what fundamental supply and demand would justify. The event of negative oil prices was a classic black swan.
Long-Term Implications: What Investors Can Learn
The oil price saga of April 2020 is not simply a case study relegated to textbooks, memes, and discussions in college finance classrooms. It serves as a reminder that events never before seen can happen at a moment’s notice. Investors must humble themselves by taking a macro approach to investing and maintaining a diversified portfolio. What’s more, you can take advantage of market dislocations by scooping up shares and bargain prices.
Four years removed from -$40 intraday oil, the S&P 500 Energy sector was the best performing of the 11 sector indexes, outpacing even Information Technology which would go on to benefit from the AI revolution. It turned out that there were more lucrative investment opportunities in traditional oil & gas than in big tech.
S&P 500 Sector Index Performances: April 20, 2020 – April 20, 2024
Source: Stockcharts.com
Two years after the extreme volatility brought about by COVID-19, Putin’s war on Ukraine led to a price spike and backwardated oil futures contracts. US crude touched $130 per barrel, up a whopping $170 from the low less than 23 months prior. It goes to show that cycles inevitably play out; fear turns to greed, pessimism turns into euphoria. Macro investors must remind themselves that near-term dislocations happen, but long-run cycles will play out.
WTI Crude Oil Prompt Month: February 2020 - February 2025
Source: TradingView
Dalio teaches that economic and market cycles indeed repeat, but never in exactly the same way. The cautionary, but also opportunistic, tale of negative oil prices in April 2020 underscores four crucial investing lessons:
You Better Know How Markets Function
Novice oil traders probably felt the most pain in early 2020. Many likely went bankrupt simply from not grasping that WTI could fall below $0 per barrel. The market mechanics of futures prices are complex; fear and greed are just as important to analyze as supply and demand.
Watch Out for Excess Leverage
Black swan events can happen at any time and without much warning. While the Big Cycle has its hallmarks, volatility can brew to the surface quickly. Markets and individual assets turn more unstable as leverage grows; oil’s fall through $0 was worsened by margin calls and forced liquidations.
Be Aware of External Macro Shocks
We might not go through another worldwide pandemic in our lifetimes, but external shocks will surely come in other forms. Such disruptions to the global economy will create rapid imbalances in commodity markets and other asset classes. So, investors must consider tail-risk events and their impacts on portfolios.
Cycles Repeat
Commodity price collapses happen time and again. Extreme bullish macro situations are sure to occur too. The critical thing from an asset allocation standpoint is to adapt to changing financial market conditions and be ready to pounce on opportunities using a dynamic macro investing approach.
The Bottom Line
How can oil prices go negative? The answer lies in what Ray Dalio teaches. By examining supply and demand dynamics, understanding oil market mechanics, and acknowledging the role of debt and cycles, investors can make sense of unprecedented events within asset classes.
Looking ahead, while WTI might not fall below $0 again any time soon, investors can take away lessons and apply them to portfolio decisions. Shocks create opportunities in today’s macro environment. A balanced portfolio keeps you in the game and able to pounce on such developments as they occur.
(Speaking of memes) In March 2020, everybody knew oil prices couldn’t go negative...
“The stock market is never obvious. It is designed to fool most of the people, most of the time.” - Jesse Livermore
The prompt month of WTI crude oil collapsed below $0 in April 2020
A confluence of factors exacerbated volatility, offering opportunities for long-term investors
Ray Dalio’s framework and macro perspectives help us understand why it happened and that unexpected events will occur again
Markets do unprecedented things all the time. It’s a dangerous game to rely solely on historical trends and cycles when making asset allocation decisions. Case in point: West Texas Intermediate (WTI) crude oil in April of 2020. During the depths of the COVID-19 pandemic, the key energy commodity did the unthinkable—its price went negative. Traders panicked and computer algorithms went haywire. It was the first (and only) time WTI dropped below $0 since futures trading began in 1983.
The stunning event wasn’t confined to unease in the oil pits. Macro investors were once again reminded that there’s no sure thing in markets; even heavily traded assets and commodities can turn wonky when the global economy falls into a tailspin. With panic comes opportunity, however, and investors willing to stomach intense volatility by getting long stocks in the Energy sector were rewarded.
But what made oil—perhaps the world’s most important commodity—go negative? Could it happen again? What should investors do today to prepare? Let’s dive into the black gold trade and step back in time to early 2020.
WTI Crude Oil in 2020: Price Dives Negative on April 20
Source: TradingView
The Economic Machine: Supply, Demand, and Market Mechanics
Like most commodity markets, price dynamics rely on traditional supply and demand factors. Ray Dalio’s core investing principle is that the economy operates like a machine, driven by traders and transactions. You see, for every buyer, there’s a seller; the two set market prices based on their perceptions of supply/demand fundamentals. In the case of oil, the fundamentals were thrown wildly off balance in early 2020 due to a few factors:
Demand Shock
The global economy halted in mid-March 2020. COVID-19 had swept across the continents, and strict shelter-in-place orders resulted in hardly any travel and industrial activity. With airplanes grounded and factories shuttered, oil demand collapsed. After several weeks, the oil supply/demand balance essentially broke.
Supply Glut
All the while, the OPEC+ oil cartel (a group that wields significant influence over oil supply) failed to agree on needed production cuts. The already-swelled market turned even more oversupplied. Producers facing bankruptcy felt forced to keep pumping oil & gas to remain as going concerns—even at historically low prices. After a few weeks, oil simply had nowhere to go.
Storage Constraints
You are probably getting the picture. Too much oil, too little demand, and oil & gas companies producing to avoid going insolvent. In March and April of 2020, oil storage facilities—like those in Cushion, OK—quickly reached capacity. This is where physical commodities, such as WTI and Brent crude oil, trade differently than stocks and bonds. Commodities require storage, and if they are topped out, strange things can happen (we’ll get more into that later).
It doesn’t take a skilled hedge fund manager like Dalio to recognize an impending disaster in oil given this scenario. The delicate global macro landscape and upheaval triggered by the pandemic brought about disorder, and the years thereafter would be riddled with inflation that would have major geopolitical implications.
At Allio, we believe investors can spot these turning points by analyzing macroeconomic variables and identifying trends. Our Macro Dashboard is a comprehensive view of the market’s opportunities in a big picture. You can view real-time market indicators, economic calendars, interactive historical charts, daily market summaries, and ETF and equity insights from our team of portfolio experts.
Futures Market Mechanics: The Key to Negative Prices
With an understanding of the supply/demand situation during COVID-19, imagine you are an energy trader in April 2020. You see oil prices fall below zero on your screen in a highly volatile and fear-driven market. Many investors thought, “So, why not be paid to take oil, store it, then sell it later on when the market normalizes?” This was absolutely a discussion had across energy trading floors across North America back then. The problem was that storage was hard to come by—even if you were paid to buy the physical commodity.
It’s also important to understand how futures contracts work—they are agreements to buy or sell a commodity at a predetermined price and date. Additionally, most oil traders don’t actually take physical delivery of barrels of WTI. Rather, they trade futures contracts from a financial standpoint and “roll them over” to later-dated contracts months before “the prompt month” settles and expires.
Throughout the COVID year, oil futures markets were in what’s known as a “contango” term structure. That’s a lot of jargon simply to describe that near-term oil contracts (the prompt month and contracts just a few months out on the curve) were much cheaper than longer-dated contracts. So, the rationale for taking physical delivery was that you could just hold the oil and then sell it, say, six months down the road for $30 or more per barrel. It wasn’t so simple, however. A contango market is quite bearish, and as the long-dated contracts come closer into view, they often decline in price. In the opposite situation, a “backwardated” oil curve reflects bullish fundamentals of high demand and tight supply.
On that fateful afternoon of April 20, 2020, the May contract was the prompt month. Oil traders faced a dire situation never before experienced:
Storage was nearly full, meaning anyone holding contracts upon expiration would have to physically take delivery with nowhere to put the oil.
Since few market participants take delivery, desperation grew to offload contracts, and the selling pressure was made worse by speculators—this was arguably the first “meme trading” event that would portend GameStop the following January and crypto altcoins years later
The result? Fearing the costs and logistical nightmare of taking physical delivery of oil during societal lockdowns and with storage facilities filled to the brim, traders long May oil futures were willing to pay others to take the oil off their hands, leading to negative prices.
From Dalio’s macro perspective, this is a classic example of how financial markets, not just economic fundamentals, drive short-term price action. It brought about a new reality that market cycles can turn so extreme that never-before-seen situations can come about quickly.
In the case of WTI on April 20, 2020, the May contract began the session near $15 per barrel and then drifted down toward $10 by mid-day. By 1 p.m. ET, the financial media was centered on oil as it neared the $0 mark. An hour later, the dams broke, and WTI didn’t just drift into negative territory—it plunged. -$1, -$5, -$20, -$40 happened sequentially in minutes.
Credit and Leverage: How Debt, Hubris, and Macro Risks Exacerbated Market Moves
The Bridgewater founder’s principles focus on the risks of an overleveraged financial system and the misuse of debt by speculators; Dalio’s Big Cycle is a theory that describes long-term macro power shifts. The same notions and determinants that perpetuate the Big Cycle apply to case studies like negative oil prices in April 2020.
Dalio's theory includes five big forces that contribute to the Big Cycle:
The Big Cycle of money/credit/debt
The Big Cycle of internal peace and conflict
The Big Cycle of external peace and wars
The Big Cycle of nature
The Big Cycle of technological developments
Oil markets in early 2020 were rocked by excess available money with no physical storage available. In years past, there may have been fewer speculative players in the market, but technology made it so that anyone with a futures trading account could participate in the volatility by 2020. ETFs, like the United States Oil Fund (USO), were another way for retail investors to take part. As always with both WTI and Brent oil, geopolitical actors, such as OPEC+, drive both near- and long-term trends.
Oil companies are partly responsible for WTI settling at -$37.63 on April 20, 2020, too. Producers and refiners have capital structures that include significant amounts of debt. Negative prompt-month prices were not planned for, so as the price gradually dipped in early 2020, they just kept drilling, hoping that a “volume over price” operating model would sustain them through the bear market in commodities. But share prices within the Energy sector, along with the broader market, were tanking by March. The Energy Select Sector SPDR ETF (XLE) dropped from $50 to $18 per share in the year’s first 54 trading days. As equity value fell, debt’s share of the sector’s collective capital structure grew in relative size, exacerbating risks for investors and firm executives.
Bigger picture, for years the oil market operated on the assumption of stable or growing demand. Producers invested heavily in infrastructure without accounting for extreme scenarios like a global pandemic. Many industries, not just oil & gas, gradually adopted a “just-in-time" mindset regarding supply chains and production. When the macro economy was disrupted, the fragility of such a logistical strategy was revealed, and harshly so.
Another geopolitical trend that hit its zenith right before the China Virus went ‘round the world was the ESG movement. At the center of ESG was an undue focus on environmental considerations. Greenwashing made investing at all costs in wind, solar, and other renewable energy the priority. The problem is that it left traditional oil & gas planning an afterthought. Moreover, renewable energy is intermittent and not as reliable as traditional fuels for power generation. This farce of a paradigm shift may have contributed to a more delicate energy market.
Dalio’s principles were on full display. Among them, is the reality that debt amplifies market movements. When oil prices fall, leveraged players in the energy space are forced to sell WTI contracts, accelerating declines beyond what fundamental supply and demand would justify. The event of negative oil prices was a classic black swan.
Long-Term Implications: What Investors Can Learn
The oil price saga of April 2020 is not simply a case study relegated to textbooks, memes, and discussions in college finance classrooms. It serves as a reminder that events never before seen can happen at a moment’s notice. Investors must humble themselves by taking a macro approach to investing and maintaining a diversified portfolio. What’s more, you can take advantage of market dislocations by scooping up shares and bargain prices.
Four years removed from -$40 intraday oil, the S&P 500 Energy sector was the best performing of the 11 sector indexes, outpacing even Information Technology which would go on to benefit from the AI revolution. It turned out that there were more lucrative investment opportunities in traditional oil & gas than in big tech.
S&P 500 Sector Index Performances: April 20, 2020 – April 20, 2024
Source: Stockcharts.com
Two years after the extreme volatility brought about by COVID-19, Putin’s war on Ukraine led to a price spike and backwardated oil futures contracts. US crude touched $130 per barrel, up a whopping $170 from the low less than 23 months prior. It goes to show that cycles inevitably play out; fear turns to greed, pessimism turns into euphoria. Macro investors must remind themselves that near-term dislocations happen, but long-run cycles will play out.
WTI Crude Oil Prompt Month: February 2020 - February 2025
Source: TradingView
Dalio teaches that economic and market cycles indeed repeat, but never in exactly the same way. The cautionary, but also opportunistic, tale of negative oil prices in April 2020 underscores four crucial investing lessons:
You Better Know How Markets Function
Novice oil traders probably felt the most pain in early 2020. Many likely went bankrupt simply from not grasping that WTI could fall below $0 per barrel. The market mechanics of futures prices are complex; fear and greed are just as important to analyze as supply and demand.
Watch Out for Excess Leverage
Black swan events can happen at any time and without much warning. While the Big Cycle has its hallmarks, volatility can brew to the surface quickly. Markets and individual assets turn more unstable as leverage grows; oil’s fall through $0 was worsened by margin calls and forced liquidations.
Be Aware of External Macro Shocks
We might not go through another worldwide pandemic in our lifetimes, but external shocks will surely come in other forms. Such disruptions to the global economy will create rapid imbalances in commodity markets and other asset classes. So, investors must consider tail-risk events and their impacts on portfolios.
Cycles Repeat
Commodity price collapses happen time and again. Extreme bullish macro situations are sure to occur too. The critical thing from an asset allocation standpoint is to adapt to changing financial market conditions and be ready to pounce on opportunities using a dynamic macro investing approach.
The Bottom Line
How can oil prices go negative? The answer lies in what Ray Dalio teaches. By examining supply and demand dynamics, understanding oil market mechanics, and acknowledging the role of debt and cycles, investors can make sense of unprecedented events within asset classes.
Looking ahead, while WTI might not fall below $0 again any time soon, investors can take away lessons and apply them to portfolio decisions. Shocks create opportunities in today’s macro environment. A balanced portfolio keeps you in the game and able to pounce on such developments as they occur.
(Speaking of memes) In March 2020, everybody knew oil prices couldn’t go negative...
“The stock market is never obvious. It is designed to fool most of the people, most of the time.” - Jesse Livermore
The prompt month of WTI crude oil collapsed below $0 in April 2020
A confluence of factors exacerbated volatility, offering opportunities for long-term investors
Ray Dalio’s framework and macro perspectives help us understand why it happened and that unexpected events will occur again
Markets do unprecedented things all the time. It’s a dangerous game to rely solely on historical trends and cycles when making asset allocation decisions. Case in point: West Texas Intermediate (WTI) crude oil in April of 2020. During the depths of the COVID-19 pandemic, the key energy commodity did the unthinkable—its price went negative. Traders panicked and computer algorithms went haywire. It was the first (and only) time WTI dropped below $0 since futures trading began in 1983.
The stunning event wasn’t confined to unease in the oil pits. Macro investors were once again reminded that there’s no sure thing in markets; even heavily traded assets and commodities can turn wonky when the global economy falls into a tailspin. With panic comes opportunity, however, and investors willing to stomach intense volatility by getting long stocks in the Energy sector were rewarded.
But what made oil—perhaps the world’s most important commodity—go negative? Could it happen again? What should investors do today to prepare? Let’s dive into the black gold trade and step back in time to early 2020.
WTI Crude Oil in 2020: Price Dives Negative on April 20
Source: TradingView
The Economic Machine: Supply, Demand, and Market Mechanics
Like most commodity markets, price dynamics rely on traditional supply and demand factors. Ray Dalio’s core investing principle is that the economy operates like a machine, driven by traders and transactions. You see, for every buyer, there’s a seller; the two set market prices based on their perceptions of supply/demand fundamentals. In the case of oil, the fundamentals were thrown wildly off balance in early 2020 due to a few factors:
Demand Shock
The global economy halted in mid-March 2020. COVID-19 had swept across the continents, and strict shelter-in-place orders resulted in hardly any travel and industrial activity. With airplanes grounded and factories shuttered, oil demand collapsed. After several weeks, the oil supply/demand balance essentially broke.
Supply Glut
All the while, the OPEC+ oil cartel (a group that wields significant influence over oil supply) failed to agree on needed production cuts. The already-swelled market turned even more oversupplied. Producers facing bankruptcy felt forced to keep pumping oil & gas to remain as going concerns—even at historically low prices. After a few weeks, oil simply had nowhere to go.
Storage Constraints
You are probably getting the picture. Too much oil, too little demand, and oil & gas companies producing to avoid going insolvent. In March and April of 2020, oil storage facilities—like those in Cushion, OK—quickly reached capacity. This is where physical commodities, such as WTI and Brent crude oil, trade differently than stocks and bonds. Commodities require storage, and if they are topped out, strange things can happen (we’ll get more into that later).
It doesn’t take a skilled hedge fund manager like Dalio to recognize an impending disaster in oil given this scenario. The delicate global macro landscape and upheaval triggered by the pandemic brought about disorder, and the years thereafter would be riddled with inflation that would have major geopolitical implications.
At Allio, we believe investors can spot these turning points by analyzing macroeconomic variables and identifying trends. Our Macro Dashboard is a comprehensive view of the market’s opportunities in a big picture. You can view real-time market indicators, economic calendars, interactive historical charts, daily market summaries, and ETF and equity insights from our team of portfolio experts.
Futures Market Mechanics: The Key to Negative Prices
With an understanding of the supply/demand situation during COVID-19, imagine you are an energy trader in April 2020. You see oil prices fall below zero on your screen in a highly volatile and fear-driven market. Many investors thought, “So, why not be paid to take oil, store it, then sell it later on when the market normalizes?” This was absolutely a discussion had across energy trading floors across North America back then. The problem was that storage was hard to come by—even if you were paid to buy the physical commodity.
It’s also important to understand how futures contracts work—they are agreements to buy or sell a commodity at a predetermined price and date. Additionally, most oil traders don’t actually take physical delivery of barrels of WTI. Rather, they trade futures contracts from a financial standpoint and “roll them over” to later-dated contracts months before “the prompt month” settles and expires.
Throughout the COVID year, oil futures markets were in what’s known as a “contango” term structure. That’s a lot of jargon simply to describe that near-term oil contracts (the prompt month and contracts just a few months out on the curve) were much cheaper than longer-dated contracts. So, the rationale for taking physical delivery was that you could just hold the oil and then sell it, say, six months down the road for $30 or more per barrel. It wasn’t so simple, however. A contango market is quite bearish, and as the long-dated contracts come closer into view, they often decline in price. In the opposite situation, a “backwardated” oil curve reflects bullish fundamentals of high demand and tight supply.
On that fateful afternoon of April 20, 2020, the May contract was the prompt month. Oil traders faced a dire situation never before experienced:
Storage was nearly full, meaning anyone holding contracts upon expiration would have to physically take delivery with nowhere to put the oil.
Since few market participants take delivery, desperation grew to offload contracts, and the selling pressure was made worse by speculators—this was arguably the first “meme trading” event that would portend GameStop the following January and crypto altcoins years later
The result? Fearing the costs and logistical nightmare of taking physical delivery of oil during societal lockdowns and with storage facilities filled to the brim, traders long May oil futures were willing to pay others to take the oil off their hands, leading to negative prices.
From Dalio’s macro perspective, this is a classic example of how financial markets, not just economic fundamentals, drive short-term price action. It brought about a new reality that market cycles can turn so extreme that never-before-seen situations can come about quickly.
In the case of WTI on April 20, 2020, the May contract began the session near $15 per barrel and then drifted down toward $10 by mid-day. By 1 p.m. ET, the financial media was centered on oil as it neared the $0 mark. An hour later, the dams broke, and WTI didn’t just drift into negative territory—it plunged. -$1, -$5, -$20, -$40 happened sequentially in minutes.
Credit and Leverage: How Debt, Hubris, and Macro Risks Exacerbated Market Moves
The Bridgewater founder’s principles focus on the risks of an overleveraged financial system and the misuse of debt by speculators; Dalio’s Big Cycle is a theory that describes long-term macro power shifts. The same notions and determinants that perpetuate the Big Cycle apply to case studies like negative oil prices in April 2020.
Dalio's theory includes five big forces that contribute to the Big Cycle:
The Big Cycle of money/credit/debt
The Big Cycle of internal peace and conflict
The Big Cycle of external peace and wars
The Big Cycle of nature
The Big Cycle of technological developments
Oil markets in early 2020 were rocked by excess available money with no physical storage available. In years past, there may have been fewer speculative players in the market, but technology made it so that anyone with a futures trading account could participate in the volatility by 2020. ETFs, like the United States Oil Fund (USO), were another way for retail investors to take part. As always with both WTI and Brent oil, geopolitical actors, such as OPEC+, drive both near- and long-term trends.
Oil companies are partly responsible for WTI settling at -$37.63 on April 20, 2020, too. Producers and refiners have capital structures that include significant amounts of debt. Negative prompt-month prices were not planned for, so as the price gradually dipped in early 2020, they just kept drilling, hoping that a “volume over price” operating model would sustain them through the bear market in commodities. But share prices within the Energy sector, along with the broader market, were tanking by March. The Energy Select Sector SPDR ETF (XLE) dropped from $50 to $18 per share in the year’s first 54 trading days. As equity value fell, debt’s share of the sector’s collective capital structure grew in relative size, exacerbating risks for investors and firm executives.
Bigger picture, for years the oil market operated on the assumption of stable or growing demand. Producers invested heavily in infrastructure without accounting for extreme scenarios like a global pandemic. Many industries, not just oil & gas, gradually adopted a “just-in-time" mindset regarding supply chains and production. When the macro economy was disrupted, the fragility of such a logistical strategy was revealed, and harshly so.
Another geopolitical trend that hit its zenith right before the China Virus went ‘round the world was the ESG movement. At the center of ESG was an undue focus on environmental considerations. Greenwashing made investing at all costs in wind, solar, and other renewable energy the priority. The problem is that it left traditional oil & gas planning an afterthought. Moreover, renewable energy is intermittent and not as reliable as traditional fuels for power generation. This farce of a paradigm shift may have contributed to a more delicate energy market.
Dalio’s principles were on full display. Among them, is the reality that debt amplifies market movements. When oil prices fall, leveraged players in the energy space are forced to sell WTI contracts, accelerating declines beyond what fundamental supply and demand would justify. The event of negative oil prices was a classic black swan.
Long-Term Implications: What Investors Can Learn
The oil price saga of April 2020 is not simply a case study relegated to textbooks, memes, and discussions in college finance classrooms. It serves as a reminder that events never before seen can happen at a moment’s notice. Investors must humble themselves by taking a macro approach to investing and maintaining a diversified portfolio. What’s more, you can take advantage of market dislocations by scooping up shares and bargain prices.
Four years removed from -$40 intraday oil, the S&P 500 Energy sector was the best performing of the 11 sector indexes, outpacing even Information Technology which would go on to benefit from the AI revolution. It turned out that there were more lucrative investment opportunities in traditional oil & gas than in big tech.
S&P 500 Sector Index Performances: April 20, 2020 – April 20, 2024
Source: Stockcharts.com
Two years after the extreme volatility brought about by COVID-19, Putin’s war on Ukraine led to a price spike and backwardated oil futures contracts. US crude touched $130 per barrel, up a whopping $170 from the low less than 23 months prior. It goes to show that cycles inevitably play out; fear turns to greed, pessimism turns into euphoria. Macro investors must remind themselves that near-term dislocations happen, but long-run cycles will play out.
WTI Crude Oil Prompt Month: February 2020 - February 2025
Source: TradingView
Dalio teaches that economic and market cycles indeed repeat, but never in exactly the same way. The cautionary, but also opportunistic, tale of negative oil prices in April 2020 underscores four crucial investing lessons:
You Better Know How Markets Function
Novice oil traders probably felt the most pain in early 2020. Many likely went bankrupt simply from not grasping that WTI could fall below $0 per barrel. The market mechanics of futures prices are complex; fear and greed are just as important to analyze as supply and demand.
Watch Out for Excess Leverage
Black swan events can happen at any time and without much warning. While the Big Cycle has its hallmarks, volatility can brew to the surface quickly. Markets and individual assets turn more unstable as leverage grows; oil’s fall through $0 was worsened by margin calls and forced liquidations.
Be Aware of External Macro Shocks
We might not go through another worldwide pandemic in our lifetimes, but external shocks will surely come in other forms. Such disruptions to the global economy will create rapid imbalances in commodity markets and other asset classes. So, investors must consider tail-risk events and their impacts on portfolios.
Cycles Repeat
Commodity price collapses happen time and again. Extreme bullish macro situations are sure to occur too. The critical thing from an asset allocation standpoint is to adapt to changing financial market conditions and be ready to pounce on opportunities using a dynamic macro investing approach.
The Bottom Line
How can oil prices go negative? The answer lies in what Ray Dalio teaches. By examining supply and demand dynamics, understanding oil market mechanics, and acknowledging the role of debt and cycles, investors can make sense of unprecedented events within asset classes.
Looking ahead, while WTI might not fall below $0 again any time soon, investors can take away lessons and apply them to portfolio decisions. Shocks create opportunities in today’s macro environment. A balanced portfolio keeps you in the game and able to pounce on such developments as they occur.
(Speaking of memes) In March 2020, everybody knew oil prices couldn’t go negative...
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This material is for informational purposes only and should not be construed as financial, legal, or tax advice. You should consult your own financial, legal, and tax advisors before engaging in any transaction. Information, including hypothetical projections of finances, may not take into account taxes, commissions, or other factors which may significantly affect potential outcomes. This material should not be considered an offer or recommendation to buy or sell a security. While information and sources are believed to be accurate, Allio Capital does not guarantee the accuracy or completeness of any information or source provided herein and is under no obligation to update this information.
Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. Performance could be volatile; an investment in a fund or an account may lose money.
There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market.
Disclosures
This material is for informational purposes only and should not be construed as financial, legal, or tax advice. You should consult your own financial, legal, and tax advisors before engaging in any transaction. Information, including hypothetical projections of finances, may not take into account taxes, commissions, or other factors which may significantly affect potential outcomes. This material should not be considered an offer or recommendation to buy or sell a security. While information and sources are believed to be accurate, Allio Capital does not guarantee the accuracy or completeness of any information or source provided herein and is under no obligation to update this information.
Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. Performance could be volatile; an investment in a fund or an account may lose money.
There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market.
Disclosures
This material is for informational purposes only and should not be construed as financial, legal, or tax advice. You should consult your own financial, legal, and tax advisors before engaging in any transaction. Information, including hypothetical projections of finances, may not take into account taxes, commissions, or other factors which may significantly affect potential outcomes. This material should not be considered an offer or recommendation to buy or sell a security. While information and sources are believed to be accurate, Allio Capital does not guarantee the accuracy or completeness of any information or source provided herein and is under no obligation to update this information.
Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. Performance could be volatile; an investment in a fund or an account may lose money.
There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market.
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Online trading has inherent risk due to system response, execution price, speed, liquidity, market data and access times that may vary due to market conditions, system performance, market volatility, size and type of order and other factors. An investor should understand these and additional risks before trading. Any historical returns, expected returns, or probability projections are hypothetical in nature and may not reflect actual future performance. Past performance is no guarantee of future results.
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Allio Advisors LLC ("Allio") is an SEC registered investment advisor. By using this website, you accept our Terms of Service and our Privacy Policy. Allio's investment advisory services are available only to residents of the United States. Nothing on this website should be considered an offer, recommendation, solicitation of an offer, or advice to buy or sell any security. The information provided herein is for informational and general educational purposes only and is not investment or financial advice. Additionally, Allio does not provide tax advice and investors are encouraged to consult with their tax advisor. By law, we must provide investment advice that is in the best interest of our client. Please refer to Allio's ADV Part 2A Brochure for important additional information. Please see our Customer Relationship Summary.
Online trading has inherent risk due to system response, execution price, speed, liquidity, market data and access times that may vary due to market conditions, system performance, market volatility, size and type of order and other factors. An investor should understand these and additional risks before trading. Any historical returns, expected returns, or probability projections are hypothetical in nature and may not reflect actual future performance. Past performance is no guarantee of future results.
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