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There is chaos in the oil markets. In the short term, the price fell below the $ 0 mark. Here are the most important questions and answers about the first negative prices on the futures exchange for US oil.
Because the economy needs significantly less oil, inventories are currently overloaded.
The oil market is going crazy: On Monday, the price of the US oil grade WTI fell below 0 in the futures market. WTI is the benchmark for oil in the United States. Occasionally, producers, traders, and investors paid around $ 40 a barrel to dispose of the raw material. The previous Friday, the WTI price was around $ 18 a barrel, which was a low note. Due to the corona crisis, the demand for oil has decreased enormously and at the same time the market is over supplied with oil.
Negative futures market prices are a technical peculiarity, but they clearly show the difficulties in the oil market.
Oil prices, which the media often cites, are formed in the futures markets. Contracts are negotiated that guarantee the delivery of a certain quantity on a predefined date. In the case of the US oil-grade WTI, which is traded on the New York Mercantile Exchange, a contract represents the delivery of 1,000 barrels of crude oil in Cushing, Oklahoma, an oil center in the United States with pipelines and tank farms. , but without access to the sea. The storage capacity in Cushing is around 76 million barrels of oil.
Each contract is negotiated for one month. The May contract expired on Tuesday. Deliveries are made on the expiration date. The old security is now actually oil. These days are generally not very dramatic because there are enough buyers to buy the oil, real or on paper.
However, many investors who had a May contract now faced the problem that they no longer wanted physical crude oil because there was no storage space for it. Due to low demand for crude oil and continued production, stocks in Cushing are full. Traders and investors therefore tried to get rid of the contract before it expired and were also willing to put something on it. Therefore, the negative price can also be interpreted as the storage costs.
There is no oil price. The most used price is the futures market notes for the contract that expires below. While the May contract for WTI turned negative, the now relevant June contract was around $ 21 a barrel on Monday, however on Tuesday the June contract price also fell. Oil is also traded for a very long period of time. The December contract for WTI was negotiated Tuesday morning for just under $ 30 a barrel.
Incidentally, this pricing structure offers a relatively easy way to make a profit: buy crude oil now and contract sell it in the future at a higher price. The problem is: you need storage capacity for oil. On the other hand, investors who do not want physical goods and buy the next contract suffer losses because the June contract is much more expensive than the May one.
WTI is also particularly relevant to the US market. As a reference value for Europe and the world, attention is paid to the trend in North Sea Brent crude oil prices. The forward market price is based on deliveries in Rotterdam. This has the advantage over the inner city of Cushing that crude oil can also be shipped for further storage, which increases storage capacity. However, on Tuesday morning, the price of Brent in the futures market fell below $ 20 a barrel.
In addition to futures market prices, there are also so-called spot market prices for various types of oil, which are a note for immediate (or almost immediate) delivery. Some of these prices were negative in the United States a few days ago or were significantly lower than futures market prices.
No First, the price of gasoline in Switzerland and Europe is based on Brent crude from the North Sea. Second, service station operators often buy crude oil based on average prices over a period of time. Third, tariffs and taxes represent a large proportion of the price on the gasoline pump.
Yes, about a week ago, the Opec + group agreed to reduce production by 9.7 million barrels of oil, which is almost 10% of world production. The oil powers Saudi Arabia and Russia have reached an agreement under pressure from US President Donald Trump. The United States became the largest oil producer in 2018, the oil industry is important to American substates such as Texas, North Dakota or Pennsylvania. In an election year, Trump had to take this into account and cooperated with the oil states, although in the past he had spoken negatively about the organization of oil exporting states (OPEC) and about low oil prices.
The hope of the oil powers was to stop the collapse of prices in the oil market. This hope was permanently destroyed a week after the agreement. It is questionable how Riyadh, Moscow and Washington will react. Some observers are already convinced that Trump will continue to introduce high tariffs on oil, as he has already been threatened. The United States could also replenish its strategic oil reserve.
The fact that the May contract falls into negative territory before it expires is not yet a long-term event. The negative price and the weakening of other oil prices show above all the weakness in demand due to the Corona crisis. Because there are fewer flights and driving and the economy in virtually every country has stagnated, oil consumption is likely to have plummeted by 30% in April. The market is likely to be oversupplied for a long time, and inventories are quickly filling up around the world, which means even more pressure on prices.
The oil market reflects the general economic crisis due to the Corona crisis. It will depend on the depth and duration of the consequences of the pandemic when oil demand recovers again. The International Monetary Fund (IMF) is already talking about what may be the worst recession since the Great Depression in the 1930s. The latest figures for Chinese economic activity were also negative.
The Corona crisis affects oil exporters twice: first, it increases their spending on health and decreases domestic economic activity. Second, oil sales revenue is declining. This could lead to a debt crisis in emerging markets that are unilaterally oriented towards the export of raw materials.
Because the oil industry has already reduced investments in new projects and the oil fields will be withdrawn from the market in the near future, the price is likely to rise again, sometimes in a massive way, when demand returns decline and inventories. Many market participants expect this to happen next year.
However, the price structure in the oil market points to relatively low long-term notes; even if futures markets are not a particularly good forecast for oil prices, as the past has shown. In the long run, how demand develops is more important due to the climate debate.
The world is already used to negative long-term interest rates. This is unlikely to happen in the case of oil prices as well. Negative prices are rare in the commodity markets – the US WTI benchmark has dropped below 0 for the first time in history.
Negative prices generally arise when supply exceeds demand and when storage capacities are full or goods cannot be stored. Therefore, negative prices are not uncommon in the electricity market. In Germany and elsewhere, the supply of green electricity, which is generated when the sun shines or the wind blows, regularly leads to negative prices when demand is weak, such as on holidays.
You can do business editor Gerald Hosp follow on twitter.
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