Oil Crash 2020

Oil prices went negative on April 20th, 2020. This essentially translated to oil producers paying buyers to take oil. This was the result of a lack of demand for oil causing a lack of storage / a fear of a lack of storage.[1][2][3]

It costs money to store oil no one wants, and thus the negative price represented an incentive for buyers to buy and store oil.

Further, this excess of supply was arguably a result of oil production not slowing down while COVID-19 slowed down the world economy, especially in respect to the demand for manufacturing and transportation.

Understanding The Oil Price Chart: As you can see in the chart above, prices for the expiring May contract for Light and Sweet Crude Oil futures reached -$40 (negative $40). That means one barrel of Light and Sweet was effectively costing a seller $40 to sell. Within the span of a few days the price went from about $20, to -$40, and back to $20 before moving lower again.

FACT: Although stocks can’t go negative, futures contracts and the price of commodities like oil can. A negative price just represents a situation in which the seller pays the buyer to take the commodity. The actual negative price is the current price being paid, the futures price is a price agreed to be paid by a certain “expiration” date.

Citations

  1. US oil prices turn negative as demand dries up. BBC.com.
  2. What does it mean when oil prices go negative? No, it doesn’t mean the gas station will pay you to fill up. CNN.com.
  3. How Oil Prices Can Go Negative. NYMag.com.


"Why Oil Prices Went Negative" is tagged with: Markets, Money, Stock Market

What do you think?