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Negative Oil Prices explained

NEGATIVE OIL PRICES


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lavanya tandon

3 years ago | 3 min read

1. What is crude oil?

Crude oil or unrefined petroleum is a type of fossil fuel used to extract petrol, diesel and various other petrochemicals. It is generally called Black Gold and is of utmost importance in global economy.

2. What is OPEC?

Organisation of petroleum exporting countries (OPEC) is an intergovernmental organisation of 13 nations which aims to maintain stable oil prices by coordinating and managing its supply in the global market.

Since most of OPEC countries rely primarily on oil production, they seek to maintain balance to earn a respectable amount of profit.

OPEC PLUS-

It is an amalgamation of OPEC countries with some other high oil exporting non OPEC countries like Russia and Kazakhstan.

3. What determines prices of oil in the market?

Economic principles of Demand and Supply determine the prices of oil in the market.

Supply of oil is controlled by high oil exporting countries like Saudi Arabia, USA, Russia etc. whereas the demand is driven by the need of gasoline products, fuel for cars and aircrafts, etc.

Since oil prices are highly dynamic and keep on fluctuating, some traders and speculators take advantage and earn good amount of profit by acting as intermediaries between the buyers of oil and sellers. They are able to do this because the price of oil is set in the future market.

A future contract or crude oil futures is a contract between buyer and seller wherein the latter agrees to supply a predefined quantity of oil barrels on a future date at a specified price to the former.

Oil market works on future contracts because it is quite volatile and its price’s changes every second!

4. Crude Oil Benchmarks

There are various types of crude oil being traded in the market. The main difference between the diversities of oil is sulphur content present in them.

It makes it difficult for buyers and sellers to decide upon a price peacefully while trading. Therefore for the convenience, there are 3 main benchmarks of oil against which all types are weighed and compared and then prices are determined.

These are –

· Brent Crude (widely used and a global benchmark)

· West Texas Intermediate crude (benchmark for USA produced crude oil types)

· Dubai Oman Crude (benchmark for diversities of oil produced in middle east)

5. OPEC plus breakdown amidst Covid-19 pandemic.

As a result of Covid-19 pandemic, all the countries imposed complete lockdown to stop the rapid spread of corona-virus. This in turn lead to complete fall in the demand of crude oil globally since there was full stop imposed on all sorts of travelling and production activities.

Due to rapid decline in demand, a downfall was observed in oil prices worldwide. Major oil producing countries suffered huge losses because prices were now less than the cost of production.

To cure the problem, OPEC decided to collectively stop the oil production for the sake of stability in oil prices and preventing small countries from losses.

However, Russia broke the alliance with OPEC and produced large barrels of oil, in order to steal oil market share from USA.

USA was one of the leading oil producers in 2019. Excess oil production by Russia ended the OPEC PLUS alliance. Here, excess supply and low demand was responsible for low oil prices.

6. NEGATIVE OIL PRICES

Negative oil prices primarily mean the sellers of oil are paying buyers to take barrels of oil from them.

West Texas Intermediate (WTI), USA oil benchmark fell down to -$37 per barrel midst covid-19 pandemic. This was the first time in history that a USA benchmark fell down to negative.

It was a consequence of denial of US government to cut down oil production due to worldwide fall in demand as it wanted to maintain its position as highest oil producing nation.

Gradually, there was shortage of storage space in Oklahoma (where oil produce is stored in US). As a result government offered to pay money to sell the oil produce. Quite a strange situation, right?

However, this was not the case with other oil benchmarks. Though there was a decline in their prices as well but prices managed to stay positive.

Due to such low oil prices, nations across the world got crude oil at cheap rates.\

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lavanya tandon

Eloquently unpacking my vision on significant financial and economical events.


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