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Stores never pay buyers to obtain their products, but in extreme circumstances, some companies do, although generally in a very limited way. However, what happened in the oil market is a massive and unprecedented turnaround, as the price of some futures contracts for US WTI crude fell to -37.63 dollars per barrel. The collapse of oil demand as a result of the global economy being blocked by the pandemic, the price war between the big producers that flooded the barrel market and the stores with storage capacity are some of the reasons for the decrease, he wrote Bloomberg in his analysis.
Why does the seller pay the buyer to take the oil?
For some producers, it may be cheaper in the long run to pay the buyer to take oil than to stop production or seek storage space for barrels. Many are concerned that closing wells could harm them forever. There are also traders who buy oil futures contracts as a way to bet on price movements, with no intention of initially participating in actual deliveries. They have to choose between a sharp drop in prices and finding a place to store and sell at a loss. At the same time, increasing excess oil makes storage locations scarcer and more expensive.
Where did the surplus come from?
Only a pandemic and a price war would only shake the energy markets. And the two things together turned the market. As the virus began to spread around the world, it began to consume the search in stages. Meanwhile, Russia and Saudi Arabia have started pumping record volumes of oil into the market.
Was there no oil agreement?
Yes, there was an agreement from the Organization of the Petroleum Exporting Countries (OPEC), Russia, the United States and the G20, but their request for a total cut in production of around 10% turned out to be too small and too late. Thus, on April 20, prices fell sharply below the world’s largest energy market, CME and NYMEX. The delivery contracts in May expire on April 21, so the great pressure from merchants was a day earlier.
What about warehouses?
The warehouses are about to fill their capacity. At the North American Central Oil Distribution Center in Cushing, Oklahoma, inventories have risen 48% to nearly 55 million barrels since the end of February. The center has an oil storage capacity of 76 million barrels, according to the Energy Information Administration of September 30. The industry is currently storing oil on board ships while considering other options, such as storing oil in tankers. The Trump administration, concerned about the effects of possible bankruptcies of oil producers, is considering a proposal, which is still in its infancy, to pay companies to temporarily keep oil on the ground. The idea is to do this until prices are restored and producers are protected from immediate losses.
What does all this mean for consumers?
In the United States, the average price of gasoline has dropped more than $ 1 per gallon in the past year to $ 1.81. And it’s been falling every day since the end of February. It will take a few more weeks for the reduction in the price of futures to affect the prices of service stations.
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