oil prices crash
oil prices crash

US crude oil prices crash and turned negative on Monday, 20th April, 2020 for the first time in history, ending the long day at a stunning minus $37.63 a barrel. Traders sold heavily because of rapidly filling storage facility at the key Cushing, Oklahoma, delivery point. The international benchmark ‘Brent crude’, also slumped. However, this contract was nowhere as weak because more storage is still available worldwide. The May U.S. WTI contract fell $55.9, which is equivalent to 306 percent, to settle at a discount of $37.63 a barrel after touching an all-time low of minus $40.32 a barrel. Brent was then down $2.51, or 9 percent to settle at $25.57 a barrel.

According to Phil Flynn, an analyst at Price Futures Group, Chicago, said that The storage is too full for speculators to buy this contract, and the refiners are running at low levels because we haven’t lifted stay-at-home orders in most states. Chances for things to change in the next 24 hours are slim. The physical demand for Crude oil depleted worldwide, creating a huge supply glut as billions of people are staying at home to slow down the spread of the novel coronavirus.

Refiners have also reduced crude oil processing than normal. As a result, hundreds of millions of barrels are currently in storage facilities worldwide. Traders have hired many vessels just to anchor them and fill them with excess oil. According to data, a record 160 million barrels is just sitting in tankers around the world. With US oil prices currently trading in negative territory, sellers have no choice but to pay buyers for the first time ever to take oil futures.

However, it is unclear whether that will trickle down to consumers, who normally expect and see lower oil prices translate into lower prices for gasoline at the pump. This may not be the case for many developing countries especially those with external debt climbing.

Normally this would be simulative to the economy around the world,” said John Kilduff, partner at hedge fund Again Capital LLC in New York. “It normally would be good for an extra 2pc on the GDP. You’re not seeing the savings because no one is spending on the fuels.

Investors and stakeholders as expected to bail out of the May contract ahead of expiry later on Monday. This is because of lack of demand for oil. When a futures contract expires, traders must decide whether to opt for the delivery of oil or roll their positions into another futures contract for a later month. As things stand, no one is sure when that later month will arrive so the risk factor is high. This process is usually uncomplicated, but due to current situation, investors will not have many buyers who will take delivery of the oil so storage remains full.

Effect of falling oil prices

A fall in oil prices usually causes a reduction in transport and fuel costs for a large number firms. Consumers will also benefit from the lower prices of transport and fuel. This drop in prices will effectively increase their disposable income and enable them to spend more on other goods. Oil is the most traded commodity in the world. Due to this fact, it has a significant bearing on global transport costs. This would rather lead to inflation and higher rates of economic growth.

However, in many countries, oil prices crash because there are fears of an economic recession. In this case, falling oil prices are not sufficient to increase economic growth because other factors keep growth low. Also, if oil prices fall sufficiently, it can cause some oil firms to go out of business increasing bad debt. Oil importing countries (e.g. Germany, Japan, India) will benefit from oil lower prices, but developing economies who rely on oil exports (e.g. Russia, Saudi Arabia, UAE, Venezuela) could see a significant fall in export revenue.