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Oil Prices: What Does it Mean When the Price Per Barrel Goes Negative?

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In an unprecedented move, oil prices went negative for the first time ever on Monday, April 20, 2020, as the benchmark for U.S. oil (West Texas Intermediate) closed at -$37.63 per barrel. An American futures contract for crude prices dropped over 100 percent, identifying the recent collapse in demand as a consequence of the COVID-19 pandemic and resulting community health measures. In a historic move, producers were paying traders to take the oil from them, as opposed to the other way around.

Traders have already cautioned that this wasn’t the market’s reality, identifying that the nearest contract for U.S. oil futures continued trading over $20 per barrel. With storage tanks filled and a drop in demand, the front portion of the oil futures ‘curve’ took the hardest hit, because it applies to fuel which was set to be delivered while much of the U.S. is in lockdown.

Oil Prices: What Does it Mean When the Price Per Barrel Goes Negative?

Photo: envato elements

With social distancing and the cancellation of group festivities in full swing, COVID-19 has dealt a powerful punch to the economy, not the least of which has been felt in the lack of global demand for oil. The industry has struggled with falling demand together with in-fighting among global producers with respect to reducing output at the same time. OPEC (the Organization of the Petroleum Exporting Countries) together with its ally nations, have inked an agreement cutting their production by 9.7 million barrels daily, effective May 1, 2020. This is the largest reduction in oil production ever. However, many industry experts argue that this will still not be sufficient to forestall the drop in demand.

Oil Prices: What Does it Mean When the Price Per Barrel Goes Negative?

Photo: envato elements

With the demand for oil and fuel at a near-standstill, global storage tanks for such are practically filled-to-overflowing. This has resulted in a mad rush by traders to lease storage (either onshore or floating) for product, in an effort to be able to eventually sell it for a profit once the prices bounce back. The matter isn’t simply about whether we can make use of it in the future. It’s about whether we can actually store what we’ve produced up to now. Experts have identified that it will take a recovery to the demand for fuel for the industry to turn around, and that’s not likely to happen until the health crisis has passed.