WHY ARE GLOBAL oil prices suddenly front-page news and what exactly is negative pricing?

In recent weeks, the price of oil has been plummeting thanks to a decline in global demand linked to what the International Monetary Fund is dubbing ‘The Great Lockdown’.

In the US, the collapse in price is being “driven by a precipitous drop in demand caused by the market expectation that the US lockdown could continue into May”, according to Tai Hui, Chief Market Strategist at JP Morgan Asset Management. 

This isn’t surprising, given flights are grounded and people are driving much less for work and leisure.

Last week, major oil producers agreed to cut production of oil to prop up prices, but so far the impact has been negligible.

This morning, European oil prices slumped to under $20 per barrel, reaching their lowest level for more than 18 years.

Yesterday, US oil prices slid below $0 for the first time ever, trading as low as -$40 a barrel (a barrel is a unit of measure used in oil pricing to denote 159 litres of crude). 

Although prices have rebounded slightly today, they remain in negative territory.

Unfortunately, this does not mean that if you can find a friendly Texan oil baron, they will pay you to take a barrel of crude off their hands and stick it in your garden shed. But it’s not a million miles away from that either.

Traders and investors who bet on oil do so in so-called ‘futures contracts‘, which have fixed time limits. Under normal circumstances, it means that they pay today to collect a certain number of barrels in the future, gambling that the price of a barrel will increase in the interim.

Most traders are not in a position to actually receive a delivery of a few thousand barrels of crude once the contract has ended. So oil ‘futures’ get traded on the open market before the contract expires, allowing the investor to cash in on the increase.

European prices

Global oil storage is a finite resource at the best of times. It’s in particularly short supply at the moment because of a row between Saudi Arabia and Russia, which resulted in the Saudis boosting oil production earlier in the year.

Today is the closing date for May contracts. These are normally busy days for trading but with the current crisis weighing down the price of a barrel and the global storage shortage, things have gotten (to say the least) very interesting.

Trifecta Consultants analyst Sukrit Vijayakar described it as “one of the most extraordinary trading days in the history of any commodity”.

Traders in US oil are currently willing to pay buyers for storage costs just to offload their barrels so they aren’t faced with having to receive deliveries.

This is the essence of negative pricing.

Analysts say that the focus is now on the June contracts.

Hui explained, “If the economic reopening takes longer than expected, we could see pressure further out in the futures curve.”

With reporting by - © AFP 2020