At the beginning of this week we witnessed a historic drop of oil prices. Not only did the price reach $0, it went further down to negative $37 per barrel. Here is why that happened and what it tells us about the future of the oil market.
First of all, we need to clarify what a negative price means. This value was the price of US oil futures for May delivery. These futures contracts expired this Tuesday. Futures expire all the time, but now the issue was that the amount of oil scheduled for May delivery was too high.
After months, years in fact, of pumping high volumes of oil, it appears that the market finally reached its limit. Demand has shrunk dramatically due to the coronavirus pandemic. Oil is commonly used to power up factories, planes, public transportation, and cars. But with the lockdowns and quarantines around the world, people are not traveling, and many factories remain closed.
This created a secondary issue with the oversupply of oil. The places intended to stockpile the extra barrels of oil are full to the brink due to the lower demand. In other words, there simply isn’t enough room where to put all of the oil that no one is buying at the moment. At least, that is the case in the United States. That is why the May futures price crashed as investors dumped their contracts in the last minute. If they hadn’t sold their contracts, they would have had to take physical possession of the oil and store it at their own expense.
Needless to say, this situation is unprecedented. It is difficult to predict what would happen in the future, as this scenario has never occurred before. Right now investors are keeping an eye on the oil futures for June where the price is still prone to volatility. Considering that oil producers are beginning to rent out external space to store the May oil, it is possible that the June contracts will crash as well. Thus, it is very likely that oil prices will continue to decrease.
Despite OPEC+ countries recently agreeing to cut production by almost 10 million barrels per day, experts claim that the market will remain oversupplied. The United States will probably have to implement its own cuts to alleviate the shortage of storage room problem.
But even then, many speculate that oil will never return to the highs of $80 per barrel seen before the oversupply crisis began. After all, the world is gradually moving towards green energy. Electrical cars are becoming more and more commonplace as well. Even after the pandemic is over, the demand for oil might not increase by as much as oil producers might hope.
As for the near future, keep an eye on oil supply data, which is published weekly by both OPEC and the US. The oil futures for June delivery right now hold the biggest potential for profit if you play your cards right.
