Crude oil prices for the first time in History went negative below 0$ on 20 April 2020. The price settled for (-)35.2$. There is a myth about crude oil prices on cash levels going negative yesterday. So, let’s clear some facts about this fall.
All commodities including Crude are traded in the Futures market which has expiry every month. What happened on the 20 April Expiry in US crude markets was due to the impact of NIL demand for crude. The mechanism of the US commodities market is such that there is no cash settlement of the Futures contract in Commodities, so the contract gets settled Physically which means those who are holding contracts will have to take delivery of Crude oil. So, speculators who did not want to take delivery in May proceeded to unwind their “positions,” leading to the massive fall in prices
From where it all started,
- PRICE WAR started by Saudi Arabia with the biggest cut in prices in the last 15 years after failure by OPEC to crack a deal to cut production. As a result, Saudi Aramco took quick action to cut prices, offering huge discounts
- Due to COVID-19 which affected lockdown across the world has stopped the economic activities in almost all the countries. Due to this, we have seen a significant fall in demand level of Crude oil which lead to a fall in prices where Supply is at peak
On 10 April 2020, Russia and Saudi agreed to cut 5 million barrel daily production. In Spite of cuts in production, their storage spaces are running short to add new products. Negative storage capacity along with no Demand of crude has resulted in taking the prices of April contract futures to below 0$ til (-)35$. So, the speculators who didn’t want to take delivery in May proceeded to unwind their “positions”, leading to the massive fall in price.
Will this drastic fall repeat?
The answer may be NO and that’s the reason crude prices are in contango. In other words, far months contracts are trading higher than the near and current month. Contango trades, when traders anticipate a surge in the rise of the value of a commodity in the near future.
What will be the effect on the global economy if demand does not revive and prices continue to fall?
Many Economies of the world directly or indirectly have huge exposure to Crude in terms of Revenue. No demand will lead to a crisis of these economies in the future, the impact of which can be seen Globally