The Times Australia
Business and Money

What just happened to the price of oil?

  • Written by Christina Nikitopoulos, Senior Lecturer, Finance Discipline Group, University of Technology Sydney
image

We have just witnessed an oil price crash like never before taking prices of West Texas Intermediate into deeply negative territory[1].

The spot price of West Texas, the US benchmark, reached minus US$40.32 a barrel and the May futures price (which is deliverable in a physical form) went to minus US$37.63[2] a barrel, the lowest price in the history of oil futures contracts.

There has been no better indicator of the extent of the economic impacts of coronavirus. With borders closed and much of the world’s population being urged to stay at home, transport has come to a near halt.

How can a price turn negative?

image

Oklahoma’s Cushing oil storage facility, the largest in the world. Crude Oil Daily[3]

The industry has not been able to slow production fast enough to counter the drop in demand. The other mechanism that normally stabilises prices, US oil storage, appears to be nearing capacity.

West Texas Intermediate is typically stored at the Cushing facility in Oklahoma[4] which is on the way to being full.

Cushing is said to be able to hold 62 million barrels of oil – enough to fill all the tanks of half the cars in United States.

That’s why prices have gone negative. Traders with contracts to take delivery of oil in May fear they won’t be able to store it. They are willing to pay not to have to take it and have nowhere to put it.

Not all oil contracts went negative. West Texas Intermediate contracts for June and subsequent months are still positive, reflecting a feeling that the supply and demand imbalance will soon be corrected.

Brent[5], the international price benchmark, remained positive, dropping to US$25.57 – a fall of about 9%. Unlike West Texas Intermediate, Brent deliveries can be put on ships and transported to storage facilities anywhere in the world.

Not confined to the US

There is no guarantee the problems of storage evident in the US won’t spread to other markets.

This is despite the decision of OPEC-Plus (the mainly Middle Eastern member of the Organisation of the Petroleum Exporting Countries plus Russia and other former Soviet states) to respond to the free fall by cutting output by 9.7 million barrels per day, ending the recent duel over production levels between OPEC and Russia.

Read more: Oil crash explained: How are negative oil prices even possible?[6]

Adding another element to the COVID-19 story, on March 9, the day of the Black Monday[7] stock market crash, the Chicago Mercantile Exchange reported a new daily record for West Texas Intermediate trading, reaching 4.8 million contracts, surpassing the 4.3 million recorded on September 2019 following the drone attacks on Saudi oil facilities.

The future does not look good. With rising unemployment, stuttering economies, and collapsing financial markets the prospects for substantial recovery in the oil markets seems far away.

Read more: The coronavirus is just the latest blow to oil producers[8]

The US, these days an exporter itself through shale oil, will suffer in the same way as traditional exporters in the Middle East.

Historically, oil markets have been considered good at predicting recessions, although in this case the causation might go the other way.

At this point the industry might be starting to consider that the best place to store oil is a natural one – leaving it in the ground.

References

  1. ^ negative territory (www.smh.com.au)
  2. ^ minus US$37.63 (www.indexmundi.com)
  3. ^ Crude Oil Daily (www.crudeoildaily.com)
  4. ^ Cushing facility in Oklahoma (www.reuters.com)
  5. ^ Brent (www.livecharts.co.uk)
  6. ^ Oil crash explained: How are negative oil prices even possible? (theconversation.com)
  7. ^ Black Monday (en.wikipedia.org)
  8. ^ The coronavirus is just the latest blow to oil producers (theconversation.com)

Authors: Christina Nikitopoulos, Senior Lecturer, Finance Discipline Group, University of Technology Sydney

Read more https://theconversation.com/what-just-happened-to-the-price-of-oil-136842

Business Times

From Farms to Festivals: How Regional NSW Is Repurposing Shipping…

Regional NSW communities are repurposing containers for farms, tourism, and events Farmers and small businesses use them...

Nail it with points: Flybuys members can redeem points for instan…

Flybuys launches new in-store redemption at Bunnings stores across Australia Tuesday 19 August, 2025 – Flybuys, Australia’s ...

Understanding Energy Use Patterns by Season

Australia’s climate changes noticeably across the year. These seasonal changes don’t just affect what we wear or how we trave...

The Times Features

How much money do you need to be happy? Here’s what the research says

Over the next decade, Elon Musk could become the world’s first trillionaire[1]. The Tesla board recently proposed a US$1 trillion (A$1.5 trillion) compensation plan, if Musk ca...

NSW has a new fashion sector strategy – but a sustainable industry needs a federally legislated response

The New South Wales government recently announced the launch of the NSW Fashion Sector Strategy, 2025–28[1]. The strategy, developed in partnership with the Australian Fashion ...

From Garden to Gift: Why Roses Make the Perfect Present

Think back to the last time you gave or received flowers. Chances are, roses were part of the bunch, or maybe they were the whole bunch.   Roses tend to leave an impression. Even ...

Do I have insomnia? 5 reasons why you might not

Even a single night of sleep trouble can feel distressing and lonely. You toss and turn, stare at the ceiling, and wonder how you’ll cope tomorrow. No wonder many people star...

Wedding Photography Trends You Need to Know (Before You Regret Your Album)

Your wedding album should be a timeless keepsake, not something you cringe at years later. Trends may come and go, but choosing the right wedding photography approach ensures your ...

Can you say no to your doctor using an AI scribe?

Doctors’ offices were once private. But increasingly, artificial intelligence (AI) scribes (also known as digital scribes) are listening in. These tools can record and trans...