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US oil prices turn negative: How did US crude oil prices crash below $0 mark?

The US oil prices turned negative for the first time in history on April 20. 

Apr 21, 2020 12:52 IST
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For the time first in history, the US oil prices turned negative on April 20, 2020. The prices of West Texas Intermediate (WTI), the best quality of crude oil in the world, crashed below $0 mark to -$40.32 a barrel in New York.

The West Texas Intermediate (WTI) crude for May delivery finished down from $55.90 to -$37.63 a barrel, falling by almost 306 percent. This is the lowest-ever crude oil price in the history of mankind. The last time the oil prices crashed was right after World War II. 

What does the fall of oil prices below the $0 mark mean?

The fall of crude oil prices below the $0 mark means that the seller or the investor will be essentially paying the buyer of crude oil for each barrel that is bought. This major downfall of crude oil prices has brought to light a growing glut of crude and a lack of storage space due to the lockdown imposed to control the COVID-19 pandemic. 

How did crude oil prices crash below $0 mark?

COVID-19 pandemic 

Though the crude oil prices had been falling over the past months, lockdowns imposed due to COVID-19 pandemic had a severe impact on the global oil demand, as with each lockdown, fewer flights were taking off and fewer cars were being used. Currently, majority of the world is in a lockdown, which means almost no commercial flights are plying and very less cars are being used. Only cargo flights and emergency vehicles are being allowed in most parts of the world to combat the rapid spread of novel coronavirus that has taken the lives of more than 1,65,000 people. Most non-essential economic activities were also brought to a halt across the globe with construction, manufacturing and processing units shut down temporarily. 

Supply more demand less

In the current scenario, while the supply of crude oil is regular, the demand has fallen. As a result, the global supply of crude oil is more than global demand. In such a case, the price of the commodity falls. Oil markets globally, especially in the US are facing an enormous glut of crude.

Role of OPEC

The Organization of the Petroleum Exporting Countries (OPEC), which is lead by Saudi Arabia, is the largest exporter of crude oil in the world. The organisation single-handedly exports 10 percent of the global demand. It used to maintain and fix oil prices in a favourable band by either increasing the production of oil or cutting it down as and when required. 

Lately, a discord between Russia and Saudi Arabia had made it difficult for the organisation to fix global oil prices and supply. While it is difficult to completely shut down an oil well or cut production as restarting the same is tedious and costly, the country that cuts production also risks losing its market share if others do not follow suit. 

Russia- Saudi Arabia discord

At the beginning of March, Saudi Arabia and Russia disagreed over the production cuts required to keep prices stable. Following this, major oil-exporting countries led by Saudi Arabia started undercutting each other on price while continuing to produce oil in the same quantities as earlier. 

What made this situation worse was the rapid spread of coronavirus and the subsequent lockdowns imposed the countries to combat the outbreak. The lockdowns resulted in a sharp reduction of economic activities and lesser usage of private transport, resulting in a major reduction in oil demand. 

Though US President Donald Trump intervened and had the Saudi Arabia-Russia discord sorted out, it was perhaps too late. While the major oil-exporting nations decided to cut production sharply, the demand for crude oil was shrinking faster. The demand for oil worsened between March and April with almost all nations going into lockdowns. The excess supply resulted in almost all storage capacity being exhausted. Ships and trains, which were used to transport oil earlier are now being used to store oil, 

US crude oil

The United States became the largest producer of crude oil in 2018. This is why US President Donald Trump has been pushing for higher oil prices. However, on April 20th, a day before the May contracts for American crude oil variant WTI was to expire, the crude oil prices started crashing. 

Two key reasons for sharp fall in oil prices:

1. Many oil producers wanted to get rid of their oil at extremely low prices instead of shutting production, as it would be costlier to restart the oil production in comparison to loss in sales.

2. On the buyer side, those holding contracts wanted to get out of the compulsion to buy more oil as there was no space to store oil if they were to take delivery. For them, it would be more costly to accept the oil delivery, pay for its transportation and storage facility at a time when oil storage options are running and there is no surety for how long the lockdowns will continue. 

This desperation from both sides, buyers and sellers to get rid of oil resulted in oil prices crashing below the $0 mark. In the current scenario, it was less costly to pay about -$40.32 a barrel and get rid of oil instead of storing it in case of buyers and stopping its production in case of producers. 

Can this happen again?

This is unlikely to happen again, as crude oil producers will be forced to cut production temporarily. However, there is no surety of whether it will get repeated again or not, as with the continuing spread of coronavirus, especially in the United States, the demand for oil has been decreasing every day. 

Did global oil prices also turn negative?

Only the US crude oil price turned negative and fell below the $0 mark. Though the crude oil prices fell in other markets as well, but not by so much. However, the oil prices are expected to be low in the coming few months as well. 

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