Image by Omni Matryx from Pixabay
Black Gold crashes on 20th April in the US
Traditionally, oil producing countries like Saudi Arabia are rich as they have that commodity that economies of the World need - crude oil. Crude oil is Black Gold, an in demand commodity by countries of the world as it is the base fuel required for running many crucial economic activities.
Crude Oil is required by many segments of the economy - Industries for production and manufacturing activities, by airline industries, by the automobile segment and Construction industries .
Therefore, the value of Black Gold, one might think would never drop to zero, however, on 20th April, Monday, the US Crude oil prices went into negative territory, impact of which you can guess, as with the Covid-19 Pandemic 90% of the world under a lockdown.
Crude Oil Sellers were paying buyers for taking delivery of OIl - May month’s WTI futures contract
Image taken from Deccan Herald article
On Monday, the West Texas Intermediate(WTI) futures contract for the month of May, dropped to minus $37.63 a barrel, meaning the sellers were paying buyers for taking delivery of crude oil, as there was too much oil stock inventory stocked with them which they wanted to get rid off literally. The May month’s WTI futures contact was expiring on Tuesday.
The physical delivery of the associated commodity; Crude Oil under the WTI futures contract, would be done in May at Cushing, Oklahoma (US), a major oil storage facility in America.
Oversupply of Oil at a time when there are no buyers for it
Image taken from Deccan Herald article
The matter concerned here is that even after all the economic activities have come to a halt around the World due to the Covid-19 lockdown, Organization of the Petroleum Exporting Countries(OPEC) and the USA were continuing to produce crude oil when there are no buyers for it. Storage capacity for storage of these oil reserves are filling up to the brim everywhere around the world, and shipment transportation of these oil reserves have become costly too.
Oil Production has to be cut drastically to sort the crude oil over supply problem
Although, recently before this OPEC countries like Russia, Saudi Arabia and others have agreed to cut down production of crude oil by 9.7 million barrels a day, this is just very little considering that in the current circumstances Crude Oil demand is so dismal that even refineries are refusing to accept crude oil to convert them into Gasoline, diesel and other products. This situation would last until Covid-19 lockdown lasts with curbs on air travel and commute. OPEC countries would have to cut production much further appropriately for a better Crude Oil price. US should also do the same.
No one imagined a situation when Crude Oil would be worthless - Extraordinary Phenomena
Unfortunately cutting down Crude Oil production is not easy like turning off a water tap, it is complicated and would necessitate shutting down of oil wells. Generally, crude oil extraction operations are planned years in advance and can’t be abruptly halted. There is no telling if the closed oil fields can later be revived easily again when needed to restore oil production. Only a few months back before the Covid-19 Outbreak, US was exporting oil, thus this sudden crude oil oversupply scenario is something that requires coping, to align efforts to cut oil production.
Crude Oil Industry in crisis now
The once coveted Black Gold before the discussed crash that took place on 20th April Monday, already was losing value, as prices of crude oil were going down to 10$ etc, which was why OPEC countries came to agreement to cut down crude oil production.
If the Crude Oil price remains in 20$ range, majority of the independent Oil companies would go bankrupt with many workers getting laid off. If the Crude Oil price gets to 30$, still many oil companies would not be able to manage functioning, although the oil industry can sustain itself, at that range.
Reference links and articles
I have acquired understanding about Crude Oil crash case study by seeing Data Dash’s Youtube Podcast on the same topic here
and by reading other articles whose links are posted below -
I don't understand what people don't understand. You can always hear how risky derivatives are. We saw that now. I prefer ETF-s, certificates, stocks, where you can never pay more of what you invested. (I'm long on oil stocks and short on oil.)
“If you had a stinking barrel of oil in your back yard, would you pay someone $100 a barrel to take it away?” (Paul Sankey in Oilprice.com)
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A lot of countries have made oil their major source of income and it is so sad that this is happening, I don't think anyone thought of this to happen any time soon.
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Resteemed already. Upvote on the way :)
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Hi @mintymile
I don't think anyone ever could imagie that this could possibly happen. World economy is just flipping up-side-down with all those future contracts.
Cheers, Piotr
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