Explaining the COVID-19 Oil Crash

Welcome back!

Seeing all the news about barrils of oil that now cost -10, I reckon that a lot of you wonder whether you will get paid in order to put gas/oil in your car.

Short answer- Unfortunately no…

Keep reading for more

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Let me offer you some info-graphics for a visual representation of the current situation

Courtesy of the website called visualcapitalist.com

So, just to recap…Last week, the number of jobless claims in America were 22 million…And now we have this firm called West Texas Intermediate (WTI) crude — the U.S. benchmark oil price -that ,for the first time in history, offers NEGATIVE PRICES FOR OIL.

As with anything,we need to look for the context.

Context information

In simple terms, the geopolitical actors (Saudi Arabia,Russia,USA,…) are going by the lowest that they can go in terms of price per barrel in order stay afloat….and hopefully get the market of the actors that will not “survive” this battle.

These oil suppliers are all part of OPEC+ ,and they started to negotiate a production CUT, because they were all aware of the fact that their product will have less demand…

But when you take into account how much of the income INTO Russia comes from oil (They do not exactly have anything to offer besides oil and natural gas ,not to mention the external limited activity with E.U )…Russia decided to walk OUT of this negotiations, and every producer decided to sell at their lowest price! Therefore, Russia continues to sell at around 20 dollars, and Saudi Arabia went as low as 6-8 dollars per barrel.

Why ?

They have the money because they are the biggest players.

Let me remind you that in this period of time, the use of oil is almost zero,compared with the situation of normal usage, that we had before this so-called “Black Swan” situation.

Sidenote -Book recommendation

The Black Swan: The Impact of the Highly Improbable

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Anyway, seeing that the demand for energy went to basically zero, Russia and Saudi Arabia decided to settle their differences.

However, this truce is too late- the prices fell about 60% from February highs.

How is it that the prices went SUBzero?

Up until recently, this was a fairly run-of-the-mill oil price crash — but then prices suddenly sunk below zero, with May futures for WTI oil closing at -$37.63 on April 20th.

For the first time in history, producers were willing to pay traders to take oil off their hands. This oddity is partially a function of the particularities of futures contracts:

  • Buyers Wanted (At Any Cost!)
    Futures contracts normally rollover to the next month without much happening, but in this case traders saw the May contract as a “hot potato”. No one wanted to be stuck taking delivery of oil when the world is awash in it and the country is in lockdown.
  • A Time and a Place
    Oil futures contracts specify a time and place for delivery. For WTI oil, that specific place is Cushing, Oklahoma. With most storage capacity booked already, taking physical delivery wasn’t even an option for many players.

In other words, sellers outnumbered buyers by a crazy margin — and because oil is a physical commodity, someone has to ultimately take the contract.

At time of publishing, the May contract and spot prices have “rebounded” to about $10. The June contract is slightly higher, at $13.

Never before has the oil industry come this close to testing its logistics capacity to the limit.”

– International Energy Agency (IEA), Oil Market Report for April

Overcoming the Supply Glut

What do you do when oil is practically free?

You store as much of it as you can, and hope that at some point you can sell it for more.

Unfortunately, everyone has the exact same idea, and as a result there is a historic glut that is filling up the world’s storage capacity both on land and at sea:

  • In March, it was estimated that 76% of the world’s available oil storage capacity was already full.
  • A record-setting 160 million barrels of oil is being stored on tankers at sea, according to Reuters.
  • The cost of renting an oil supertanker has gone through the roof. It’s jumped from $20,000 per day to $200,000-$300,000 per day, according to Rystad Energy.

It remains to be seen how fast the transportation industry will recover in a post-COVID-19 world, but for now the outlook for all oil producers is grim. The continued fallout will not only affect industry, but also the countries that rely on oil exports to balance their budgets.

This is it guys, I hope I want succint enough and that you have a better understanding of the situation that we are all in.

I do hope to see you around soon!

Also, do not forget to SHARE this article if you enjoyed it !

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SubZero Oil prices explained by Financial-minimalist.com

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