Oil Prices Turn Negative
When we thought things couldn’t get any more upside down, the oil markets went negative on Monday, meaning prices fell so much that sellers would have to pay buyers to take oil off their hands.
Looking back at oil market movements in 2020, oil sold for over $60 a barrel at the beginning of the year. Then, coinciding with the coronavirus pandemic, crude oil dropped to around $20 when Saudi Arabia started a price war with Russia in early March. Prices had already dropped 30% with reduced demand and when OPEC agreed to cut oil production by an additional 1.5 million barrels oil prices dropped even more.
Yesterday, (April 20, 2020), the price fell into negative territory when the price dropped more than $50 a barrel to end the day about $30 below zero, the first time oil prices have ever turned negative.
How can prices go negative, you may ask?
With reduced travel and international trade seizing up, oil producers are in dire need for storage capacity. Nobody wanted to buy more oil because there was no place to store the oil they already own. The price turned negative meaning that anyone trying to sell a barrel would have to pay a buyer $30. In reality, no oil was traded under these prices. The price simply illustrates the condition of the market.
Despite a deal by Saudi Arabia, Russia and other nations continue to cut production and the world is running out of places to store the amount of oil the industry keeps pumping out — about 100 million barrels a day.
While the oil industry is in the tank now, history tells us oil will come back (oil prices are already back to positive levels today) and that volatility with commodity prices comes with the territory.
*data is from wsj.com and the chart shown above is from Macrotrends.net