For the first time in history, the price of US oil has turned negative. It implies that the oil producers are paying the buyers to offload their commodity over fears that they would run out of storage capacity in May.
In wake of the coronavirus lockdowns, the worldwide demand for oil has reduced drastically. Hence, oil companies had to rent tankers to store the surplus supply.
What does it even mean?
Notably, the price of a barrel of West Texas Intermediate (WTI), the benchmark for US oil, fell to minus $37.63/barrel.
As BBC reported, oil is traded on its future price and May futures contracts will expire today (April 21). Therefore, traders wanted to offload those holdings to avoid the hefty storage costs.
"If you don't have storage you have to get out"
"The people who are long are desperate to get out," said Phil Verleger, an oil economist and independent consultant. "If you don't have storage you have to get out."
Now, they have to cut the production
Further, the oil producers have agreed to cut the production by 9.7 million bpd, but these cuts won't happen before May. Notably, Saudi Arabia is ramping up deliveries of oil, including shipments to the United States.
The oil consumption, across the world, is roughly 100 million barrels a day, and supply generally stays in line with that. But consumption is down about 30% globally.
Where do we go from here?
It is a precarious situation as right now the world effectively has more crude oil than it can use. Even, the capacity to store is fast filling.
Until the lockdowns are eased and the global pandemic situation comes under control, it is highly unlikely that the demand parameters would change. The demand has to rebound for the markets to turnaround.
What is COVID-19?
COVID-19 was first reported in China's Wuhan city late last year. The disease is caused by a novel coronavirus called SARS-CoV-2.
The virus attacks a host's respiratory system triggering symptoms such as fever, cough, and breathing difficulties.
In severe cases, it may cause pneumonia, multiple organ failure, or death.
COVID-19 has spread to over 170 countries, killing 1.54 lakh and sickening 22.5 lakh.