In a bizarre turn of events, the price of oil in the US markets crashed below zero dollars on 21st April 2020. This happened for the first time in US history and is believed to have a catastrophic effect on the world economy at large.
But what does it mean really?
The price of one barrel of crude oil depends on a variety of factors. These include, supply, demand and quality.
Since the whole world is under lockdown due to the ongoing Coronavirus pandemic, people have stopped travelling. Due to this, the demand for fuel has decreased suddenly. On 21st April the negative crash of $37.63 a barrel in the US market.
The negative price is restricted to a contract of the West Texas Intermediate (WTI), the type of crude oil that is produced in the industries in the US.
The shortage of demand and oversupply has filled the storage tanks of WTI so much so that now they are finding it difficult to make space for them.
The Hindu quoted the U.S. Energy Information Administration as saying that their last week’s storage at Cushing, Oklahoma, was about 72% full as of April 10. They said:
There’s no available storage anymore so the price of the commodity is effectively worthless,” said Bob Yawger, director of futures at Mizuho in New York. “So when it’s minus a dollar, they’ll pay you a dollar to get it out of there.
How is oil traded?
Another reason for the negative price of oil is hidden in the way oil is traded in the world. Crude oil is traded in the futures markets or an auction market where a buyer bids for it for delivery on a certain date.
Each contract lasts for a month and the contract for May was to end on April 21 itself. However, considering the present situation, the investors who were holding the May contracts did not want to take delivery of the oil.
This is because they did not wish to pay storage costs. In the end, they had to pay people to take it off their hands.
The June contract, on the other hand, is still being traded at above $20 dollars a barrel.
Does this mean oil would be free in the US?
No, the crash in the crude futures prices would not mean that the prices would crash at the gas pumps for consumers.
Tom Kloza, a veteran analyst with Oil Price Information Services said:
We’ll continue to see gasoline prices, diesel prices and jet fuel prices drift lower into May but one shouldn’t conclude that we’re going to see fuel given away or that we’re going to match these incredible, unprecedented drops we saw in crude oil today.
What does it mean for the economy?
30% of the global demand for oil, close to about 30 million barrels a day, has been pumped into storage worldwide just in the past two or three months. Even if we go back to the pre-virus demand, we would take a lot of time to burn off all that stored crude oil.
This explains the rapidly falling price of June crude oil contracts. It fell by 18.4% to $20.43 a barrel.