The 2016 Oil Crash: When the World Was Drowning in Crude

In February 2016, a barrel of WTI crude oil cost less than $26. That was the lowest price since 2003. Just 18 months earlier, the same barrel was selling for $110. A 76% drop. Chapter 40 of Torsten Dennin’s “From Tulips to Bitcoins” tells the story of how the world literally ran out of places to store all the oil it was pumping, and what happened when OPEC and Russia finally decided to do something about it.

The Crash After the Crash

Oil had already been through one brutal crash in recent memory. In 2008, during the global financial crisis, WTI went from $150 all the way down to $33. That was painful enough. But the recovery was fast. By the end of 2009, oil was back at $80. Between 2011 and 2014, it settled into a comfortable range around $100 per barrel. Everyone got used to that number.

Then in the summer of 2014, the floor fell out. Oil started dropping and just kept dropping. From $110 in June to below $26 by February 2016. Month after month of lower prices. No bounce. No recovery. Just a slow, grinding collapse that wiped out billions.

Drowning in Oil

The core problem was simple. There was too much oil and not enough demand.

After the 2008 crash, the market had entered a condition called super-contango. That is when future oil prices are much higher than current prices. It makes it profitable to buy oil now, store it, and sell it later at the higher future price. So that is exactly what traders did. They bought oil and stored it everywhere they could. Onshore tanks. Offshore tankers. Anywhere with space.

By 2015, US storage levels were sitting near 80-year highs at around 490 million barrels. And they were barely declining. The International Energy Agency warned that markets could “drown in over-supply.” In 2015 alone, about 1 billion barrels were added to global inventories. The IEA warned that the world could soon run out of physical space to store all the oil being produced.

Think about that for a moment. Not running out of oil. Running out of places to put it.

February 11, 2016: The Bottom

The first weeks of 2016 were ugly across every market. The Chinese stock market plunged, and the panic spread worldwide in what some called another “Asian contagion.” The US dollar was retreating from highs of 100 on the Dollar Index. Everything felt like it was falling apart at the same time.

February 11, 2016 was one of those days. The S&P 500 was down 12% on the year. The Bloomberg Commodity Index had dropped 30%. And the Baltic Dry Index, which tracks the cost of shipping bulk goods by sea, hit an all-time low of 290. When shipping rates collapse like that, it means global trade is slowing down hard.

Oil was at $26. Commodities across the board were at multi-year lows. The mood was grim.

But as Dennin points out, February 11 turned out to be the bottom. Not just for oil. For many assets. Sometimes the darkest moment is also the turning point.

The Recovery Nobody Expected

In the weeks and months that followed, commodity markets started to improve. Slowly at first, then with real momentum.

Gold led the way. After the Brexit vote in June 2016, gold traded above $1,380. Silver shot above $21. These were significant moves for precious metals that had been beaten down for years.

Oil climbed from $26 in February to above $50 by October. Sugar went from 10 cents per pound in August 2015 to above 24 cents by September 2016. Iron ore, zinc, tin, nickel, and lead all posted double-digit gains in 2016.

The Baltic Dry Index, which had been at that depressing all-time low of 290 in February, climbed to 915 by early October. That is a 215% increase in eight months. Global trade was picking up again.

By the end of 2016, commodities were up more than 20% from their lows. WTI crude had doubled to above $55 per barrel.

OPEC and Russia Make a Deal

The big turning point for oil specifically was a production cut agreement between OPEC and Russia. It was the first time OPEC had agreed to cut production since 2008. And getting Russia on board was significant. Russia is not an OPEC member, and coordinating production between OPEC and non-OPEC producers is notoriously difficult.

But the pain of $26 oil was enough to bring everyone to the table. When your national budget depends on oil revenue and the price has dropped 76%, politics become easier.

There was a wild card though. US shale oil. The fracking revolution had made the US a major oil producer again, and shale producers could ramp up quickly when prices rose. Every time OPEC cut production and prices went up, American shale drillers would start pumping more. That threatened to prolong the glut.

Still, the massive global inventories were declining. Demand was picking up. And by May 2018, OPEC reported that the global oil surplus had been nearly eliminated. The strategy worked. It just took time.

Bitcoin in the Background

Dennin mentions an interesting detail. Bitcoin had a terrible 2015, trading below $200. But in 2016, it started recovering alongside commodities. At the time, nobody was paying much attention to it. The crypto story would get much louder in 2017. But the recovery started here, in the same year that oil and iron ore and sugar were all climbing off their lows.

What Stays With Me

This chapter is the story of a market drowning in its own supply. Oil is the most important commodity in the world. Wars have been fought over it. Empires have been built on it. And in 2016, there was so much of it that we were running out of tanks to put it in.

The number that sticks with me is 1 billion barrels added to global inventories in a single year. That is a staggering amount of oil that nobody needed. The super-contango after 2008 had created an incentive to store oil rather than use it, and by 2015 the consequences of that were everywhere. Tank farms full. Tankers sitting at anchor loaded with crude. The IEA warning about running out of storage space.

And then the detail about February 11, 2016. The S&P down 12%, the Baltic Dry Index at an all-time low of 290, oil at $26, commodities down 30%. If you were watching markets that day, everything looked hopeless. But that was the bottom. That is usually how bottoms work. They do not announce themselves. They happen on the ugliest, most depressing day, when selling is exhausted and there is nobody left to panic.

The OPEC-Russia deal was important, but what really ended the bear market was time. Enough time for demand to catch up. Enough time for the massive inventories to slowly drain. Enough time for the market to figure out that $26 oil was too cheap, just like $150 oil had been too expensive.

The commodities that recovered in 2016 read like a grocery list: oil, gold, silver, sugar, iron ore, zinc, tin, nickel, lead. When everything goes up together like that, it is not about any single commodity. It is about the cycle turning. Bear markets end. They always do. The hard part is being there when they do.

Based on Chapter 40 of “From Tulips to Bitcoins” by Torsten Dennin (ISBN: 978-1-63299-227-7, River Grove Books, 2019).

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