Why oil went under $1

What "negative oil" means for you

Apr 21, 2020 | Editorial | Business
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If this is what your see-saws look like, you might be in Texas.

I heard the price of oil dropped?

Indeed it did. US crude oil futures (the price for oil delivery in future months) for June were down 9% to just over $22 dollars a barrel.

But history was made for May's oil futures: they plunged to negative $37, essentially worthless.

Why did this happen?

Oil had already been way down from its highs this January due to a price war between Saudi Arabia and Russia. But that's not the reason it went negative on Monday.

The principal, unprecedented cause: we're running out of places to store all the oil that we produce.

And why are we running out of room?

Shelter-in-place. As the demand for for fuel drops as much as 30% during the pandemic, oil that would've been consumed is hanging around, taking up space as new oil barrels surpass current storage capacities.

Since these are futures contracts, the purchase and delivery are commitments that have already been made and can't be reversed. This leaves the value of next month's oil incredibly low: no one wants it since they're not sure where to put it.

However, traders are trying to capitalize, buying oil and letting it sit on tankers adrift at sea rather than selling and distributing it to an unwilling market, trying to capitalize on a contango market.

What's a contango?

It's not a travel company or movie ticket service, but rather a situation that implies the value of an asset (in this case oil) will go back up, or rally, in the future.

Oil traders believe there will be demand again, and are thus buying low with the hopes of selling high when the world resumes more normal business activities.

Will my gas be cheaper? Could it even be free?

Don't expect a massive change in gas prices. While they may drift slightly down this May, the value of barrels in June is positive, meaning that in the future oil will become more valuable again.

The negative price, while an anomaly, represents a historic level of uncertainty in one of the blue-chip sectors in the economy of the world's highest oil and gas-consuming nation.



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