This week saw an unprecedented event in the global market as the Oil or “Black gold” plunged in the negative as a result of economic slump amid ongoing pandemic crisis. West Texas Intermediate (WTI), the bench mark of US oil which was being traded at $15 a barrel on Monday, fell as low as -$40 per barrel, as the world submerged in oil all around the world. “This has never happened before, not even close,” said Tim Bray, senior portfolio manager at GuideStone Capital Management in Dallas. “We’ve never seen a negative price on a futures contract for oil.” Aftershocks of this bizarre event were felt across the Thames too as Brent crude (UK benchmark) fell below $20 a barrel for the first time since 2002. Oil prices are now at record two-decade low.
Negative price doesn’t necessarily mean that exporters would give money to take the oil to the consumer, as it is safeguarded by ‘futures contract’ which allows the seller to sell a commodity at a predetermined price at a specified time in the future. So these oil prices are actually market prices of future months, according to British Broadcasting Channel (BBC), although investment in oil industry seems volatile for now. Futures contract for June are expected to be 15pc low as Economists expect volatility in oil prices.
There are various factors behind any general dip in the prices. Oil is a commodity and therefore susceptible to “supply-and-demand” principle. When it is over-supplied and demand is low, prices fall and vice versa. Organization of Petroleum Exporting Countries (OPEC) is an inter-governmental organization consisting of 13 oil-producing countries—6 in Middle East, 6 in Africa, and Venezuela. These countries pump about 80pc of world’s oil reserves alone and therefore sets the production level in accordance to consumer demand and can control prices. Often at times OPEC has been reluctant in cutting production despite less demand for oil, leading to depreciation in price, such as one seen in 2014-16 when price of a barrel fell below $100. Other factors such as US shale-oil production also played its role in it.
Another factor that can cause oil prices to fall is environmental or natural disasters. Such events usually lead to disruption in steady demand of oil as consumer base shrinks for that time resulting in over-supply that in turn causes oil to become cheap. And such a factor has played on this time. Demand of oil is in a free-fall as cities remain in lockdown and road-activity is way, way reduced. This situation is leading to scarcity of storage hubs as majority nears maximum storage capacity, some for the first time ever, such as a storage at US oil hub Cushing has already grown to more than 15 million barrels in the past month. “Coronavirus is rewriting the rules of the global economy in front of our very eyes. With oil demand virtually non-existent, this quite amazing sell-off is almost entirely down to fears over storage.” said Adam Vettese, analyst at eToro.
OPEC has agreed with US in a historic supply slash off that would reduce 10pc of entire oil production in an attempt to rebound the prices quickly, although it may not be enough to stabilize the prices and prevent over-storage. Usually such prices benefit consumers too and are considered a boon for the troubled economies. It is different this time since all activities have been disrupted and do not profit consumers the least. It is expected that if this situation persists, storages around the world would fill by May and we might ‘swim in black gold’.
by: Ahsan Anwar