As though we haven’t seen enough jaw-dropping market moves these days, crude oil stole the show as it slipped to negative territory.
That’s right, subzero levels yo!
Nope, it ain’t a glitch on your charts, and you don’t need to get your eyes checked either.
The U.S. benchmark West Texas Intermediate (WTI) for May plummeted from around $18 to a low of -$37.63 per barrel early this week. This basically means that producers were willing to pay this amount just to have barrels of oil taken off their hands!
What’s up with that?!
If you’ve paid attention in your Economics 101 classes, you’d know a little thing called the Law of Supply and Demand.Part of this law states that prices are weighed down by either a drop in demand or an increase in supply. Having more of a particular asset just lying around in oversupply makes it less valuable, and you wouldn’t expect prices to be jacked up for something that’s not sought after.
Now what do you get when you have almost non-existent demand AND rapidly rising supply?
A free fall, that’s what. In crude oil’s case, a 300% crash in prices:
That’s not something you see every day!
WTI crude oil eventually settled around $1.10 per barrel by the end of the session, which is still an unprecedented low.
There are a number of factors you can pin this on, but it was likely a combination of all these:
- Coronavirus outbreak weighing on business activity and fuel purchases (↓ demand)
- Quarantine measures and nationwide lockdowns resulting to trade and travel restrictions (↓ demand)
- Oil price war among major producers like OPEC nations and Russia (↑ supply)
- OPEC output deal being too little too late, leaving producers room to pump more oil out before May 1 (↑ supply)
- Storage facilities like Cushing running out of room to store unused barrels of crude oil (↑ supply)
- Futures contracts requiring physical delivery of the commodity upon expiry
Talk about a series of unfortunate events!
What does this mean for you?
Before y’all start rushing out to the nearest oil hub to stock up on the commodity, keep in mind that these subzero prices are specifically for May WTI futures contracts and that these are due to expire TODAY.Unless you have superpowers, I doubt you’ll be able to hoard barrels of oil at these bargain prices before the contracts expire.
This is why many also believe that the crash may be the opposite of a short-squeeze, as traders who went long on these contracts rushed to exit.
Who’d want to physically deliver worthless barrels of oil or find (and pay) someplace to store it all, right?
So, what’s next?
While the price crash would likely lead to cheaper gasoline prices or lower airfare, it’s not like people would be able to go on road trips or international travel adventures anytime soon.
In other words, demand is still likely to be limited, so prices might not have much room to recover.
Even so, based on oil futures with expiry dates later in the year, it looks like oil traders are still hoping for a decent rebound:
Of course a lot of this hinges on how COVID-19 containment efforts turn out, and whether or not stimulus packages from governments and central banks are doing the trick.Oil cartel members still seem to be scrambling to get their act together, although the OPEC suggested that they could start the output cuts much earlier.
U.S. President Trump also attempted to stem the bloodbath by saying that the government is willing to add as many as 75 million barrels of oil to the Strategic Petroleum Reserve in order to reduce oversupply.
Think these measures would be enough or are crude oil prices about to go much lower from here?