Why Oil Prices Go Subzero: Covid-19 Oil Crash Explained #infographic

Why Oil Prices Go Subzero: Covid-19 Oil Crash Explained #infographic

The Great Lockdown is continuing to turn markets on its head.

Last week we dug into the unprecedented number of initial jobless claims coming from the United States, which peaked at 22 million over a four-week period.

It's just days later, and we already have our next market abnormality: this time, traders were puzzled by West Texas Intermediate ( WTI) crude — the U.S. benchmark oil price — which for the first time in history somehow flipped negative.

Why can that be? And how does this usually fit in with the COVID-19 oil price crash?

How Prices Went Subzero

Until recently, it was a fairly run-of-the-mill oil price crash — but then prices suddenly fell below zero, with WTI oil's May futures on April 20 closing at $37.63.

The producers were willing to pay traders to take oil out of their hands for the first time in history. This oddity is partly a function of the nature of futures contracts:

  • Companies 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”. When the world is awash in it and the                   country is in lockdown, no-one wanted to be stuck taking oil delivery.

  • A Place and Time

          Oil futures contracts shall define a delivery time and location. That particular place for the                  WTI  oil is Cushing, Oklahoma. With most storage capacity already booked, many players                  didn't even have an option to take physical delivery.

Sellers, in other words, outnumbered buyers by a crazy margin — and because oil is a physical commodity, somebody ultimately has to take the contract.

The The contract and spot prices have "rebounded" to about $10 at the time of release. The contract for June is a bit higher, at $13.

Why Oil Prices Go Subzero: Covid-19 Oil Crash Explained #infographic

infographic by: www.visualcapitalist.com

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