Oil Price Dropped Below Zero: Good or Bad?


Oil price moved to the negative zone for the first time since futures trading started in 1982. Oil price historical dropped below zero at -$37.63 level, what next? Is the oil price below the zero levels good for the economy? Let’s unlock the answer!!

22 April, 2020, | AtoZ MarketsOil markets have at the worst rate since the first Gulf war in 1991, due to the price war between Russia and Saudi Arabia. As a result, global markets may soon be dripping in oil supply, although the demand for energy plummets. Those events are repeating around the world, from emerging market currencies to US bonds.

Energy markets got hit through an unprecedented crosscurrent: demand for oil is withering due to worries that new coronavirus spread will weaken worldwide economic growth. Ironically, a skirmish between the world’s largest oil-producing countries means the delivery of oil is poised to skyrocket. Russian officials, reportedly aiming to harm US energy businesses, refused to trust their OPEC companions on a price cut to stabilize oil prices. Saudi Arabia retaliated through slashing its official costs and signaling that it’s going to crank up output.

US President Donald Trump has said the US government would buy oil as the country’s national reserve. However, concern continues to grow as storage facilities in the US might run out of capacity. The main delivery point in the US for oil has started to rise at 50% since the start of March, according to ANZ Bank.

Before proceeding depth into the effect of oil price drop below zero, let’s see the reason behind the collapse.

Reasons Behind the Oil Price Crash

US Oil prices traded below zero for the first time in history. It means producers or traders had been paying other marketplace individuals to take the oil off their arms.

It is far the clearest signal that the coronavirus has reduced the oil demand employing as much as a third worldwide that has turned the US oil market on its head. 

The price crash came as the American benchmark oil contract, West Texas Intermediate, headed towards its expiry date for May contract, the month when demand hit from lockdowns, and travel restrictions started to peak.

Each month WTI futures contracts change on CME organization’s NY Mercantile Exchange. It needs to be settled with the physical delivery of crude oil, giving a real-global link to one of the world’s heavily traded derivatives.

Oil Price Drop Below Zero

Typically this occurs each month without any incident or drama. However, on Monday, it turned into distinctive. Analysts accept the lack of available storage capacity on the WTI settlement’s transport point of Cushing, Oklahoma. Therefore, it activated panic among investors who are holding derivative contracts, have discovered themselves with no place to reserve oil.

WTI opened for trading on Sunday night at $18 a barrel. Later on, oil price drop below zero to as low as minus $37 a barrel.

CME Group said that its market was operating, adding that the negative price indicated that spot and futures prices were converging as drawn. 

“Today’s negative settlement price in the May WTI futures contract reflects both the global oversupply of crude oil and high levels of storage utilization in the United States,” the exchange operator said late on Monday. 

Overall, the reasons for the oil price crashes are:

Impact of Oil Price Crash on the Global Economy

The European financial market faced a massive drop in response to the oil price movement. It created fear among traders that this volatility in the energy price will lead to financial stress on organizations. It will hit their reserves and may require to fund additional money to support their businesses and possibly will decrease consumer confidence.

However, the effect is not so apparent yet. The decrease in oil prices may lead to lower fuel and energy expenses. Therefore, people may have more money in their pockets due to this incident.

That would inspire us to spend more than we otherwise might, which means it could act as a shape of financial stimulus.

What does it suggest for the environment?

For environmental purposes, increase in oil prices is reasonable. Due to the high price, people will be discouraged to use natural resources. Therefore, it will reduce carbon dioxide emissions to the environment. Moreover, people will seek alternative energy sources that are not bad for the environment. A decrease in the oil price will allow people to use more oils, and as a result, it will bring a positive effect on the environment. 

Oil price crash

From this perspective, sharp declines in worldwide oil prices are undesirable due to the fact they make the dominant fossil gasoline cheaper and more aggressive in opposition to low-carbon alternatives.

However, the victims for oil price drops below zero are oil producers in the US. Most of the oil producers need the oil price at least in the range of $50 to $60 per barrel, which allows them to make a profit. Therefore, the growth possibility of oil companies is now questionable. It is time to see how the US President Donald Trump reacts to this crisis. Currently, he was seen to assure oil-producing companies by his Tweet:

Oil Price Drop Below Zero

How Can Traders Make Profits from Oil?

Retail traders usually follow the concept that we need buyers when we want to sell and we need sellers when we want to buy. Therefore, as a trader, we should find buyers in the selling market in a larger time frame.

The concept of retail trading depends on how the larger market movers are reacting. In that sense, we need to understand what big players can do with the oil price. Before buying oil, retail traders need to have a confirmation that larger players are willing to buy and they are ready to pick the price up. 

On the other hand, another logic might be to buy the oil price is that the price is currently at the historically low. On the other hand, oil is an essential element for the global economy as most of the businesses and transports depend on oil. Therefore, there is a higher possibility that the demand for oil will increase. Due to the current worldwide lockdown, people are not going outside like usual days. Therefore, the need for oil is currently low, which is temporary.

If we want to buy oil with this concept, we are usually acting as a position trading or investing. The risk associated with this concept is that we don’t know when the price will go up. It may go up as soon as the antidote of COVID-19 discovered or it might take a long time to end the economic war between Russia and Saudi Arabia.

Overall, it is the duty of traders to set the mindset on whether we will act as a trader and follow the more significant players’ movement or invest in oil with the hope that the demand will increase in the future.

Conclusion

Oil prices have collapsed slowly this year. Later on, the oil price drop below zero based on Monday’s price action. 

However, May contracts for West Texas Intermediate crude (WTI) were got expired on Tuesday with contract holders to unload their oil at a loss. June WTI contracts, which measures for future oil deliveries, were doing a bit better, selling at around $16. However, it remains far below the break-even level for companies and oil-producing countries.

The demand for oil around the world has no reason to sustain below zero for a long-term basis as most of the industries and vehicles depend on fuels. Therefore, any indication of minimizing the effect of the COVID-19 outbreak might increase the oil demand, but the question remains- when it will start to rise?

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