HOW COULD OIL PRICES GO NEGATIVE? THE SIMPLEST EXPLANATION

Apr 21, 2020
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The financial market has just witnessed something unprecedented in history: Negative oil prices.

Last week, the West Texas Intermediate (WTI) crude oil price on the New York Stock Exchange stood at 18.27 USD/barrel. However, at the end of the second trading session, this price plummeted without losing to only 37.63 USD/barrel.

Worth mentioning is that in this session, WTI crude oil price has continuously set unprecedented records, the lowest price sometimes dropping to minus 40.32 USD/barrel - marking this as the most terrible decrease range in a single session of oil prices in history.

The accurate numbers

WTI June oil futures dropped by 10% to 22.54 USD per barrel. July oil futures dropped by 5%, to 28 USD per barrel. Meanwhile, Brent June oil futures fell to 26.13 USD per barrel.

What is the cause?

The reason for the unprecedented decline in oil prices on Monday was largely because investors were concerned about the declining market demand due to the effects of the Covid-19 epidemic. In addition, the maturity of the upcoming May contract also has a strong impact on investor transactions.

At this time, the price of the so-called "black gold" fuel was hit hard by declining global demand as most economies were in full or partial blockade to limit spread. of the disease. Meanwhile, the oil depots are in full condition.

What do experts say?

Helima Croft, commodity strategist at RBC Capital, said: "There is a lot of oil but refineries have no demand. At the moment, I have not seen any short-term support. for the oil market, the prospects in the near future are really worrying ".

Up to now, the Covid-19 epidemic has caused great concern to global economic activity, especially oil demand. Meanwhile, OPEC + and other countries' production cut agreements are not sufficient to offset the demand for fuel that is falling freely due to the pandemic.

"The current state of supply-demand imbalance lies in the price issue. If output remains the same, the oil depots will continue to be filled day by day,” Bjornar Tonhaugen, head of the oil market in Rystad Energy said.

How can a price go negative?

So, what does negative oil prices mean? With a negative price of nearly 40 USD, anyone who buys a tank of 159 liters of oil will be "given" 40 USD. The seller is giving extra money to the buyer to receive his goods.

Put simply, this is similar to hiring someone to take out the garbage. When the garbage is too much and cannot be stored in the house, we have to pay someone to take it away.

However, it is not easy for us to access this "garbage" right now. Unlike stocks, gold or virtual currency, oil is "real", and to receive a barrel of oil and 40 USD donated, the buyer must be present at the warehouse in Cushing, Oklahoma, USA. Even though oil prices went negative, we can’t get access to it. In the time of lockdown like this, leaving your house is definitely not a good idea.

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