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For anyone seeing the oil headlines but not the context, this is the product of a very extreme bit of market mechanics.
Short version: It is a single US contract for buying oil that will lapse tomorrow, which has collapsed in price as there’s nowhere to store the oil *right now*
Short version: It is a single US contract for buying oil that will lapse tomorrow, which has collapsed in price as there’s nowhere to store the oil *right now*
Extra details because people are (reasonably) asking:
The specific oil contract (there is no single ‘oil price’) that has collapsed for West Texas Intermediate (WTI) crude.
Most people are more familiar with Brent crude (oil from the North Sea). WTI is crude from the US 1/7
The specific oil contract (there is no single ‘oil price’) that has collapsed for West Texas Intermediate (WTI) crude.
Most people are more familiar with Brent crude (oil from the North Sea). WTI is crude from the US 1/7
The specific contract that has plummeted in value is the WTI futures contract for May. That is effectively (I am being simplistic) a forward bet on oil prices during May. The May contract will lapse tomorrow, and be replaced by the contract for June 2/7
The June contract is fairly stable (at about $21 dollars a barrel currently). Traders have thrown in the towel on May because once the contract lapses, they have to *actually find somewhere* to put the oil. And right now, nobody has any space 3/7
Why? You guessed it: coronavirus. The pandemic has caused demand for collapse. Usually that prompts producers (i.e. Saudi Arabia, Russia etc) to cut output, to inflate the price. However, due to *geopolitics* (I am now being VERY simplistic), supply is still very high. 4/7
That means oil is still flooding into the global market as an incredible pace, but not being used up. As a result, storage capacity is quickly running out.
Now, nobody wants to pay for oil they can’t store, so once this situation becomes severe, oil’s value plummets 5/7
Now, nobody wants to pay for oil they can’t store, so once this situation becomes severe, oil’s value plummets 5/7
So how can prices turn negative?
Imagine you’re a US shale oil producer. Even if prices are temporarily negative, the price of stopping production is huge. That means that (for a few days at least), you might accept the pain of effectively paying someone to take your oil 6/7
Imagine you’re a US shale oil producer. Even if prices are temporarily negative, the price of stopping production is huge. That means that (for a few days at least), you might accept the pain of effectively paying someone to take your oil 6/7
It’s possible this fall may translate into slightly lower prices for consumers, but negative prices at a market in New York are not gonna translate into a bunch of oil barrels with $0 price tags on them outside the local garage.
Hopefully that explains the basics! 7/7
Hopefully that explains the basics! 7/7
