West Texas Intermediate (WTI) crude for May delivery fell to -37.63 U.S. dollars a barrel on Monday, the first negative price in history since the New York Mercantile Exchange began trading oil futures in 1983.
WTI crude is the U.S. benchmark used for oil pricing. The following explains the notion of a negative oil price, how it occurs and how it will affect people and the industry.
WHAT DOES IT MEAN
A negative oil price means that people who have oil to sell are willing to pay for it being taken off their hands over fears that storage capacity could run out in May.
HOW DOES IT HAPPEN
The low prices for WTI oil come as demand for oil has fallen 30 percent as a result of the novel coronavirus outbreak, which has caused great decline in airline, car, shipping, and trucking traffic as well as manufacturing production.
Oil supply, on the other hand, has not fallen as fast. Oil producing countries agreed earlier this month to collectively slash global output by an unprecedented 10 million barrels a day, or about 10 percent.
But demand has dropped by 30 million barrels a day or more, meaning there is far more oil than the world needs.
HOW WILL IT AFFECT PEOPLE AND INDUSTRY
It is worth noting that only U.S. crude for May delivery plunged negative, while the price for June WTI crude oil is still at 20.43 dollars per barrel.
The June contract, which was more actively traded, is a better reflection of the reality in the oil market.
Meanwhile, the international benchmark, Brent Crude, which has already rolled to the June contract, settled 8.9 percent lower at 25.57 dollars per barrel on Monday.
So it does not necessarily mean that consumers worldwide, including those in the United States, will see a dramatic change of gasoline prices at gas pump as in the crude markets.
Yet the historic reversal in pricing is still a reminder of the strains facing the oil market, warned Stewart Glickman, an energy equity analyst at CFRA Research, one of the world’s largest independent investment research firms.
June prices could still fall if lockdowns remain in place, said Glickman. “I’m really not optimistic about the prospects for oil companies or oil prices,” he said.
Read alsoWhat does a negative oil price mean?
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