From Institutional Investor, November 19:
Cushing, Oklahoma, set the stage for the Great Oil
Price Crash of 2020. But was it really to blame?
On the way to Cushing, Oklahoma, a young man, weary from the traffic and the chaos of the mule skinners, teamsters, and oilmen, sought refuge in a cobbled-together, unpainted saloon at the side of the road. He had been hub-deep in the mud for more than an hour, waiting to get into town, but had traveled less than a mile in the waning twilight.
Discouraged, he made his way to the bar to order a drink. Glancing down, he saw an inebriated man drowsing on the floor. Nearby, two men were slumped over a card table, nodding off. The bartender, who also seemed to be dozing, ignored him when he spoke. When he touched the bartender’s arm, the man crashed into a heap on the sawdust-covered floor. That’s when the young man noticed the cash register was open and empty. Everyone in the room was dead.
Rushing outside and shouting, “Murder!,” the man tried to flag down help, in vain. It was the height of Cushing’s oil boom. By 1917 the town was pumping more than 300,000 barrels a day. None of Cushing’s wildcatters — among them future oil billionaire J. Paul Getty — wanted to lose his place in the bumper-to-bumper line to the oil fields. Violence was commonplace. Robbery, looting, and murder were part of the landscape. It’s a story told among the residents to this day, and can be found in the out-of-print book Cushing: The First 100 Years.
Once at the center of America’s black-gold rush, Cushing is now the world’s largest onshore oil storage and energy market hub. Signs of its long, tumultuous history can be seen throughout the town, which is situated on a barren plain surrounded by muddy grasslands. Pump jacks swinging their slow, mesmerizing limbs search for the last of the region’s oil in backyards, schoolyards, churchyards, and empty lots. The city’s population, which peaked in 1930 at just below 10,000, has been in decline ever since, lingering at slightly above 7,000. The town’s graveyards have more people in them than the homes. Beneath the ground, oil pipelines converge from every corner of North America, harking back to when oil flowed in Texas and Oklahoma seemingly without end.
“It’s just been a part of life here for as long as I can remember,” says 70-year-old Farrel Kleckner, a retired postman and a lifelong resident of Cushing. He also serves as the town’s honorary historian. “When I was a kid growing up on Cherry Street, I’d go out on the porch and the whole town would smell like sulfur. No one complained. People would say it smelled like money.”
But the tiny town of Cushing is now the focus of a monthslong government investigation into why the price of West Texas Intermediate light sweet crude oil futures dropped below zero on April 20, briefly trading at minus $40.32 a barrel before settling at
–$37.63.“The one thing that everyone will remember about the oil market is that it went negative in 2020,” says Paul Horsnell, head of commodities research at Standard Chartered in London. “This is a physical story. It’s a good story because it’s a resonant story. Look at what was going on in the world at the time with the pandemic. A lot of people were panicking. The markets were under extreme stress, and prices and demand were falling very rapidly. The numbers in Cushing did look pretty horrible — but Cushing did not fail.”
The reason Cushing is a physical storyis that it provides physical barrels of oil to investors across the globe betting on the most heavily traded commodity on earth: light sweet crude oil futures, traded on the New York Mercantile Exchange.Indeed, it is the connection between the cash prices for Cushing’s “wet” physical barrels and the “paper” prices of Nymex crude oil futures contracts that gives the market its credibility. Each Nymex contract is exchangeable for 1,000 barrels of physical crude oil.
Horsnell, who is based in Oxford, England, has been to Cushing a few times, usually as a pit stop on trips to Oklahoma City. “There’s not anything to see or do; it’s just a pipeline crossroads,” he says. “But I always insisted on taking the diversion, much to the frustration of my colleagues.”
Each time he has visited, he’s surveyed the town’s “tank farms” — hundreds of massive steel oil tanks stretching from north to south, as far as the eye can see.
A lonely outpost in what was once “Indian Territory,” Cushing is an unlikely physical delivery point for barrels of oil against the West Texas Intermediate futures contract, but its influence was cemented long ago with its oil boom. The city is more than 500 miles north of Houston’s international shipping channel, 70 miles northeast of the nearest major metropolis — Oklahoma City — and 1,400 miles from Wall Street.
When the first crude oil contract started trading there, few suspected it would permanently put Cushing on the map, let alone rivet generations of Saudi oil ministers and market prognosticators, but that’s exactly what happened. Launched in 1983, the Nymex crude oil futures contract almost immediately became a global benchmark and, to this day, remains the basis for how banks, hedge funds, trading firms, power plants, gas stations, and fuel distributors around the world price a barrel of oil.
In the nearly four decades since, Cushing’s oil pipelines and storage infrastructure have rapidly expanded, gobbling up hundreds of acres of the town and its outskirts, with a handful of companies dominating the terrain and the profits. “The delivery point for the oil contract is there because the infrastructure was already there, and now there’s even more infrastructure there because the contract is there,” Horsnell explains.
“It’s a little bit of a historical accident,” he adds.
The reason Cushing’s numbers looked so horrible last spring is that, just as oil prices fell below zero, the town’s oil storage tanks appeared to be nearly full, triggering a price collapse that did not stop, even when the barrel lost all value. At the time, investors were racing to liquidate their positions in Nymex crude oil futures before the contract expired and entered its delivery phase in Cushing. Many were forced to sell at negative prices after learning there might not be enough room left in Cushing’s oil tanks to take delivery.
Such incidents, though rare, are not necessarily shocking, given Cushing’s idiosyncrasies. “The fact is, commodities are great big bulky things when you have physical delivery,” Horsnell says. “The mechanics of the market can have bizarre effects on prices. Physically delivered commodities aren’t like financially settled contracts. When you get into commodities, you get into all kinds of trouble with physical delivery. Infrastructure matters. The old economy, of which physical commodities are a part, is clunky.”
Crude oil’s plunge into negative territory is now the subject of an investigation by the U.S. futures regulator, the Commodity Futures Trading Commission. Although oil prices have not turned negative again, questions remain about what, exactly, happened and if there was market manipulation afoot. In the aftermath of the price crash, CFTC chairman Heath Tarbert announced that he would undertake a detailed forensic study into what he called “the crude oil price aberration on April 20."....
....MUCH MORE
Related:
The Day Oil Went Subzero
"Oil’s Plunge Below Zero Was $500 Million Jackpot for a Few London Traders"
