Crude oil works on the market principles of supply and demand. When people want more of it, then scarcity drives the price of a barrel upward. If there is more product than what is necessary, then the cost goes down.
Because stay-at-home orders are keeping people out of the workforce and eliminating the need to drive, demand for American oil crashed in March and April. Those events caused the price for U.S. crude to fall into negative territory. It is the first time in history that this event happened.
The price in late April reached ($37.63) – the parentheses indicate that the number is negative. That means if you want a barrel of oil, someone will pay you that amount.
The Issue Involved the Futures Market
When traders start operating in the crude oil market, one of the most lucrative options is to purchase futures.
Most people can make money by storing crude to sell it at a higher price on this market. What made the circumstances different for the May 2020 contracts in April was a desire to avoid any physical deliveries of this commodity. That means they started trying to sell out of their positions, creating a negative price.
Consumers benefit from this outcome because it lowers the price of fuel. AAA reported that the average price for gasoline in the United States was $1.81 per gallon.
It is a short-term gain because the negative territory and low retail pricing make it a challenge to support jobs. Ongoing problems with trading, even when it is at $24 per barrel on other markets not involving futures, create even more issues to consider.
Is Negative Oil Pricing a Doomsday Scenario?
After the futures market experienced such a historic low, industry analysts predicted that shut-in wells and bankruptcies would soon follow.
When the June contracts come due, a similar situation may happen. People are likely to pay to get rid of the oil they have deals for, but can’t take once again unless more global openings occur. It may take 3-6 months before this issue stabilities.
The long-term potential for oil and natural gas is strong since Americans and the rest of the world need a vast amount of energy to recover economically. We need to get past the issues with COVID-19 before that becomes possible – and there isn’t a timetable for the virus since an effective treatment plan is still not available for the general population.