US, WASHINGTON (ORDO NEWS) — Stores never pay customers for the goods they purchase, but in extreme situations, companies sometimes do this, although usually on a very limited scale. However, what happened on the oil market can be called a massive and unprecedented negative shift, as the prices of some futures contracts for West Texas crude oil (WTI) fell to minus $ 37.63 per barrel.
The collapse in oil demand due to the self-isolation regime caused by the coronavirus pandemic, the price war between the world’s largest producers, overflowing the market with oil flows, filled to the point of failure of the oil storage, as well as the monthly rhythm of the futures market, all played a role in this overwhelming development of events.
1. Why does the seller pay the buyer to take the oil?
For some manufacturers, in the long run, this may turn out to be cheaper than reducing production or looking for additional places to store fuel spurting from the ground. Many are concerned that shutting down wells may lead to damage and their future operation becoming unprofitable. In addition, there are traders who buy futures contracts, betting on price movement, and they absolutely do not intend to accept deliveries in real oil barrels. They may find themselves in a difficult situation in the event of a sharp drop in prices, as they will be forced to either find storage or sell oil at a loss for themselves. An ever-increasing excess of oil has led to a shortage of storage facilities, and storage itself is becoming more expensive.
2. What caused the excess?
Both the pandemic and the price war separately could cause a shock to energy markets. And together, they just turned them upside down. When the coronavirus began to spread around the planet, the demand for oil began to decline in stages. And just at the moment when countries such as Italy showed what economic damage the national self-isolation regime could cause, Saudi Arabia and Russia, the largest oil producers in the world, decided to face their foreheads. The pact that held back oil production collapsed, and both countries opened cranes at full capacity, throwing a record amount of crude oil onto the market.
3. Was it possible to make a deal?
Yes, there was a deal prepared by OPEC, Russia, the United States, and the G20. However, the call contained in it to reduce total production by about 10% was insufficient and belated. Oil prices initially became negative in such “dark” corners of the United States market as Wyoming, where there are few oil storage facilities. Then, negative prices began to be fixed at major nodal points for small batches of certain types of crude oil. And on April 20, prices plummeted and fell below zero on the Chicago Mercantile Exchange (CME), the world’s largest energy market, as well as on the New York Mercantile Exchange NYMEX.
4. What did futures contracts have to do with this?
The lowest price was noted in futures trading – these are contracts under which the buyer purchases goods at a set price at a set point in time. Delivery contracts in May were supposed to end on April 21, as a result of the day before that the maximum pressure was exerted on those traders whose contracts expired by this date. For them, selling oil at a sharply negative price was better than pumping it into domestic bathtubs, with the market being overwhelmed so that the physical domestic derivatives market for derivatives transactions had to put up with the negative prices for WTI crude oil in the city of Midland, as well as for oil brands Mars Blend, Light Louisiana Sweet and Heavy Louisiana Sweet.
6. What happened to the vaults?
Since the formation of excess crude oil and falling prices, the occupancy rate of storages began to approach its maximum. Crude oil inventories in Cushing, Oklahoma (this is the key storage and supply center for WTI oil contracts) increased by 48% and reached approximately 55 million barrels in late February. According to the Energy Information Administration, as of September 30 of last year, the total storage capacity of the center was 76 million barrels. Oil began to be stored on tankers, and searches were also made for other storage methods, including in railway tanks.
The Trump administration, worried about the possible ripple effect due to bankruptcies, is considering such a proposal – to provide funds to oil companies in order to so that they temporarily leave oil in the bowels of the earth. But this proposal is still only in the initial phase. The idea is to not put this oil on the market until prices recover. In this case, the Ministry of Finance will receive a good profit and at the same time protect manufacturers from direct losses.
7. What does this mean for consumers?
Across the country, non-gas prices fell more than $ 1 per gallon (3.79 liters) last year to $ 1.81. Since the end of February, they are constantly falling. A couple of weeks are needed to reduce the price of futures reflected in the price of gas stations. If we take into account that part of the price is taxes, then the cost of gasoline is at the lowest level.
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