When Benchmarks Fail: The Causes and Consequences of Negative Oil Prices

44 Pages Posted: 20 Dec 2023

See all articles by Erik Gilje

Erik Gilje

University of Pennsylvania - The Wharton School

Robert C. Ready

University of Oregon - Department of Finance; University of Oregon - Charles H. Lundquist School of Business

Nikolai L. Roussanov

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Jérôme Taillard

Babson College

Date Written: December 15, 2023

Abstract

On April 20, 2020 the flagship North American benchmark price for crude oil, West Texas Intermediate (WTI) for delivery in Cushing, OK, fell below $0 for the first time in its history. We explore the causes and consequences of this event. Using a simple theoretical model, we argue that negative prices were the result of constraints on physical storage, but that these constraints were precipitated by positions of financial traders unable to take physical delivery prior to the expiration of the May 2020 futures contract. We then provide evidence that this event impacted the decisions of oil producers, including those not directly impacted by the storage constraints at Cushing, through their exposure to the WTI benchmark in their purchasing contracts. Our evidence suggests that asset price dislocations can have real effects due to their importance as contracting benchmarks.

Keywords: Negative Oil Prices, Benchmark, Futures Prices

JEL Classification: G10, G13, Q40

Suggested Citation

Gilje, Erik and Ready, Robert C. and Roussanov, Nikolai L. and Taillard, Jérôme, When Benchmarks Fail: The Causes and Consequences of Negative Oil Prices (December 15, 2023). Available at SSRN: https://ssrn.com/abstract=4666143 or http://dx.doi.org/10.2139/ssrn.4666143

Erik Gilje

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Robert C. Ready (Contact Author)

University of Oregon - Department of Finance ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States

University of Oregon - Charles H. Lundquist School of Business ( email )

1208 University of Oregon
Eugene, OR 97403-1208
United States

Nikolai L. Roussanov

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jérôme Taillard

Babson College ( email )

323 Tomasso Hall
Babson Park, MA 02457
United States
6145994184 (Phone)

HOME PAGE: http://https://www.babson.edu/academics/faculty/faculty-profiles/jerome-taillard.php

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