What Does A Negative Price Mean?
For the first time in US history, benchmark US crude oil prices traded in the negative. In practice, this means that those in the market were basically paying each other to take oil off their hands. This historic drop has sent oil firms around the world reeling.
What Caused This Plunge?
Every month, West Texas Intermediate (WTI) contracts are settled. The WTI is a US benchmark oil contract that is traded on the New York Mercantile Exchange. The futures contracts are deals with prices and quantities agreed upon prior to the actual physical trade of oil. Each month, when the contract is settled, the many abstract trades and deals are brought back to reality, in the shipment of actual crude oil.
This month, the contract settlements did not go off without a hitch.
The coronavirus pandemic has caused a one-third drop in crude oil demand worldwide. This is because of lockdown orders and travel bans. People aren’t traveling, even locally. On Monday, the contracts neared the expiry date for May delivery. Most countries are projecting that the peak of restriction will be reached in May, which caused a huge decrease in demand that day, meaning a lowered price.
An even larger factor contributing to the negative price has been a lack of storage space for all this crude oil. Crushing, Oklahoma is the WTI contract’s delivery location. It is nicknamed the “Pipeline Crossroads of the World.” At that location, there is nowhere to store the excess of crude oil, causing traders to try to offload barrels as quickly as possible.
On Sunday night, crude oil was trading at $18 a barrel and by the end of Monday, it had dropped to negative $40 a barrel.
It was this combination of an excess supply of crude and a shortage of storage for it that caused a huge drop in prices. If you can’t store it, you need to get rid of it, so you lower the price.
What This Means For You At The Pump
Unfortunately for the public, crude oil prices do not directly determine retail gasoline prices. This means a negative price for crude oil doesn’t mean the gas station will be paying you to fill up.
Wholesale gasoline prices are more closely tied to the price at the pump, and those prices did not experience a huge decline on Monday. The wholesale price went down 67 cents on Monday, but that’s still twice as high as it was last week.
Saudi Arabia, Russia, and Trump, Oh My!
For over the last month, there has been a web of drama surrounding the world of crude oil. This disastrous Monday is sure to fuel the flames of the panic among OPEC and Russia.
The plunge in prices is being recognized as a huge embarrassment for Saudi Arabia, Russia, and President Donald Trump. Saudi Arabia and Russia had been caught in a savage price war, as Saudi Arabia tried to force Russia into cutting their supply of crude oil. This was a Saudi attempt to force higher oil prices.
President Trump had been working with the two countries to form a deal, as the price war between them that promised to bankrupt American crude oil firms. Trump had referred to it as a “great deal for all.”
Unfortunately, this drop in price has made the entire deal moot. The plan to cut crude oil supply in half in May will not fix the current storage problem.
Now there are a few options for the U.S. The federal government might seek further supply cuts from OPEC, implement tariffs on foreign oil imports, offer firms a subsidy to refrain from extracting any more oil from the ground or find more places to store oil.
Oil transportation and storage companies have just become the belle of the ball, so if you invested in these firms earlier this year, the drop implies a great future payoff.