Why oil prices dropped negative, and will it impact consumers at petrol pump?

Introduction

  • Oil prices in the United States, for the first time in history, touched sub-zero amid an utter collapse in demand spurred on by the coronavirus pandemic; at this stage, even as global institutions have made massive production cuts, supply still far outstrips the demand.

Why crashing Oil prices ?

  • The spread of the coronavirus has sharply reduced air travel and thus the demand for fuel.
  • Oil markets have plunged in recent weeks as lockdowns and travel restrictions to fight the coronavirus around the world battered demand for the commodity.
  • The crisis was compounded after Saudi Arabia, kingpin of exporting group OPEC, launched a price war with non-OPEC member Russia. Riyadh and Moscow drew a line under their dispute earlier this monthwhen they and other countries agreed to cut output by almost 10 million barrels a day to boost virus-hit markets. But prices have continued to fall heavily, with recent trends indicating that the cuts will not be enough to make up for massive falls in demand caused by the pandemic.
  • China cut their imports of foreign oil by about one-fifth in the past months.
  • With space to store oil scarce, US benchmark West Texas Intermediate (WTI) for May delivery ended trading at -$37.63 a barrel ahead of Tuesday’s close for futures contracts, which is when traders who buy and sell the commodity for profit would have had to take physical posession of it.

What do you mean by a negative oil price?

  • Oil is a commodity traded on its future price, with the May contracts set to expire today (each contract trades last a month). In simplest terms, the negative oil prices means the commodity producers are willing to pay purchasers to take oil off their hands amid fears that most storage facilties will run out of space by the end of May.
  • They are seen as very keen to avoid taking possession of those oil holdings and having to deal with the storage costs. The real problem of the global supply-demand imbalance has started to really started to manifest itself in prices.
  • Demand for oil has collapsed so much due to the coronavirus pandemic that facilities for storing crude are nearly full. Tanks could hit their limits within three weeks, according to reports.
  • In summary, the steep fall in the price is largely because of the lack of sufficient demand and lack of storage place given the fact that the production cut has failed to address the supply glut.
  • Take the case of US benchmark WTI. Reutershad reported the US Energy Information Administration statement last week that storage facilties at Cushing, Oklahoma, the heart of the country’s pipeline network, was about 72 per cent full as of April 10.

What do the prices say about the economy?

  • The negative prices can never be taken a true reflection of the commodity values. Rather, they are attributable, in large parts, to the intricacies of the global oil trading market.
  • A better indicator would be the oil futures price for June. For that month also WTI had plummetted, but the commodity was trading at above $20 per barrel. Same is the case for Brent Crude, the European benchmark, for which, according to BBC, the June contracts were also weaker, trading down 8.9 per cent at less than $26 a barrel.
  • These prices paint a larger picture, indicating that the supply-demand imbalance is here to stay

What does it mean for the consumer?

  • The crash in crude futures prices won’t necessarily translate into a crash in prices at the gas pump
  • We’ll continue to see gasoline prices, diesel prices and jet fuel prices drift lower into May but one shouldn’t conclude that companies and governments are going to see fuel given away
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