Why did the Oil Price turn Negative today?
- Posted on April 21, 2020
- Editors Pick
- By admin
Today the United States Crude Oil price became negative because the demand for oil has slowed to the point that the seller of crude has to pay the buyer to take the oil that he wants to sell.
Here is how Bloomberg described the strange thing that happened to oil today
Why would a seller pay a buyer to take their oil?
For some producers, it may be cheaper in the long run than shutting down production or finding a place to store the supply bubbling out of the ground. Many worry that shutting their wells might damage them permanently, rendering them uneconomical in the future. There are also traders who buy oil futures contracts as a way of betting on price movements who have no intention of taking delivery of barrels. They can get caught by sharp price drops and face the choice of finding storage or selling at a loss. And the escalating glut of oil has made storage space scarce, and increasingly expensive.
Two major reasons why crude oil price touched the negative zone.
- Coronavirus Pandemic
- Oil price war
Read more about the oil price war below.
Saudi Arabia (OPEC) Launches Oil Price War Against Russia
This is how future contract affect oil prices
It just like buying stock options, the buyer buys the right to purchase future contracts at a certain price and at a certain time.
The oil consumers use the future to control the price in terms of hedging it in case demand and supply get out of hand. But this doesn’t always work out correctly when another factor like coronavirus is in the discussion.
“The contracts run for a set period, and traders who don’t want to unwind their position or take delivery generally roll over their contracts shortly before expiration. Contracts for May delivery were due to expire on April 21, putting maximum pressure the day before on traders whose contracts were coming due. For them, selling at a steeply negative price was better than filling bathtubs with oil, though the market rout was such that the physical domestic crude market did see trades on an outright basis for grades like WTI in Midland, Mars Blend, Light and Heavy Louisiana Sweet crudes at negative levels. “ - Bloomberg
To be updated soon.
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