Hello friends
The price of crude oil has gone into the negatives across the world
At the time of making this video, the price of WTI crude oil is minus 16 dollars per barrel
minus 16 dollars!
It has never before happened in history that oil prices have dropped below zero
A lot of mockery is being made out of this
A lot of memes are being made on the internet
It might come across your mind that perhaps if you go to a petrol pump to get your car tank filled,
the petrol pump people are going to pay you to get your tank filled up
This does not mean that, friends
What exactly is the meaning of this?
Why has the oil price dropped into the negatives and what will its consequences be?
We are going to talk about all of this in today's video
Come, let us see
First of all, I'd like to remind you of a basic economics lesson. I had talked about it in a previous video
Have a look
The price of anything in a free market depends on demand and supply
If the demand of something is more while the supply is less, then its price will rise
The same is with oil. If the demand of oil is less and the supply is more, then its price will fall
In this entire video I had explained what problems are being encountered in oil pricing from the supply side
Basically, there is an ongoing tussle between countries regarding oil price
They all want to compete with one another
I have talked about all of this in the video. If you haven't watched it, I'd suggest you do so
You can watch it by clicking on the "i" button
Now, I will continue forward from the situation that I had previously explained in that video
The matter of fact is that the demand of oil worldwide has fallen so drastically in the past month
that no one had expected it
The flights have been cancelled due to the lockdown. So the demand of jet fuel dipped.
The people have not been stepping out of their homes, so the demand for oil in car tanks also fell
The factories are all lying shut, so the demand for requirement of crude oil there too, has fallen
So the demand for crude oil has fallen in so many places
and as we already know, if the demand of something falls, then its price too, will follow suit
But if the supply is reduced too, then the price can be kept stable
Now, as I already stated in the last video, all the oil producing countries are at loggerheads with one another
Russia, Saudi Arabia, USA
Who can make their competition the best and this is why they were not agreeing to cut down on their supply
But the demand fell so drastically that all the oil producing countries have finally realized
that they were incurring losses themselves if they refrain from taking action and cutting down supply
So, finally, on 13th April, all these oil producing countries
I wouldn't say all, but almost all of the oil producing countries finally worked out an agreement
a historic agreement
because before today- for Saudi Arabia, Russia and USA to agree on the same thing together
had never happened before. I mean, this rarely happens
But on 13th April, Drumpf worked out a deal with Saudi Arabia and the OPEC + countries
OPEC+ includes both Saudi Arabia and Russia
that they would reduce their supply by 9.7 million barrels per day
and reducing supplies would keep prices stable
and they all could make a respectable amount of profit
Despite this, the oil price crashed further below on 20th April and it ran into the negatives
At its worst, it reached minus 40 dollars per barrel
Let us talked about why this happened
If you've been attentive, I had said in the beginning of this video that WTI benchmark of oil is in the negatives
So what is this WTI bench mark?
We will have to understand this first
What regions of the world is crude oil found in?
Which quality of crude oil is available there?
It can so happen that better quality crude oil is found in some regions
and some regions have inferior quality crude oil
Some regions have oil with a higher sulfur content
and some regions have oil with a lower sulphur content
Some regions have oil reserves in the land and some have them in the oceans
The oil from the land reserves need pipelines to be transported
and hence they are difficult to be transported
Ship tankers can be made use of easily to transport oil from the ocean reserves
So basically what I'm trying to say is that the crude oil extracted from different regions has different qualities
and if you are an oil buyer and want to purchase oil,
then you will have to keep in mind the things like the region that you are buying oil from
what quality oil are you buying
and how cheap it will be to transport that oil
But how are you going to decide what value should be assigned to which crude oil
How much money should be given for this level of quality of crude oil
How much money should be given for that level of quality of crude oil
Benchmarks exist for this purpose
There are different benchmarks for the crude oil coming in from different parts of the world
Benchmarks are basically a reference line
to compare the values of the different crude oils
Although there are a lot of different benchmarks for oil in the world
but there are three main benchmarks where the oil coming from all the different regions of the world
are referenced against
The first and the most popular benchmark is Brent Crude
This is the oil that is extracted from the North Sea near UK and Ireland
This oil has a high sulphur content and this oil is good for (the production of) diesel
It is extracted from the sea
Two thirds of all crude contracts in the world use the Brent Crude for reference
Now what are crude contracts?
I will talk about this later in the video
The second benchmark is West Texas Intermediate
This oil is extracted from the wells in USA
This oil is extracted from land reserves and is transported through oil pipelines
There is a state in the USA- Oklahoma
This oil gets transported there and this is the main delivery point to obtain this oil
There is one difference that you can already see here
The Brent Crude oil is extracted from and transported through the sea
This one is extracted from the land
Obviously, it is more difficult to transport
And the third benchmark is Dubai and Oman
The oil extracted from the Arab countries is viewed in reference to this
The situation today, as you might have noticed, the WTI price has fallen into the negatives
But the price of Brent Crude is still in the positive
+20 dollars per barrel
Why so?
One reason behind this is that Brent Crude is extracted from the ocean
It is quite easy to store and transport in ship oil tankers
But in the case of WTI, it( the oil) is extracted from the land
It is transported in pipelines and brought to Oklahoma , which is the sole delivery point
as compared to Brent Crude, which has multiple delivery points
All the ships can come and take their oil from their facility
Here, (in the case of WTI) the entire oil is brought and collected in Oklahoma
Infact, there is a town by the name Cushing
This is where all the oil is stored
Majority of the oil storage facilities of USA are housed here
So there is a lack of storage in this case
So this is why there is such an acute shortage of storage for the oil producers there
that they're saying that they would pay to take away the oil because they don't have enough space to store it
They already have produced so much
This is a very simplistic explanation
There are more complexities in this. I'll tell you
Let us now talk about what crude contracts are
The trading of crude oil today, that is, buying and selling of crude oil
is done through future contracts
One way would be that the seller sells directly to the buyer and the buyer pays him
How much does he pay?
The buyer pays the seller according to the value of crude oil price at that specific point of time in the market
and the job is done
But nobody does this
Nobody does this because the price of crude oil fluctuates so much in the market
It becomes risky for both the buyer and seller
If they do not know what price would they sell the oil at
Assume they produce a specific number of barrels of oil
but they do not know for how much are the rest of the barrels going to be sold in the future
If the price of oil falls very low in the next month, then they would have to incur huge losses
This is why future contracts are made
and future contracts is basically like pre ordering
The buyer and seller make a consensual contract to trade a specific amount of oil at a specific point of time
That means, there's a date in the future when the oil would be delivered, at a specific price
The price is already pre decided
The date of delivery is also pre decided
This tells the producer how much oil he has to produce
and there's a guarantee that he would get the pre-decided price
He would not be in complete loss
This is what is called future contracts
Now, there's a very interesting thing here- the future contracts between the oil sellers and the oil buyers
Such future contracts can be bought by people like you and me
Now you'd ask what you can do by buying such future contracts
You have no use for crude oil
Actually, we will not buy these future contracts to get crude oil but to earn money
Basically, somewhat like middlemen
We take the future contracts from the oil sellers and wait for the oil buyers until the price of oil goes up
and then sell it to the oil buyers
and we earned money by being the middlemen
This is called the futures trading
Several investors do this to make money
So, viewing from the seller's perspective, I took out a future contract and left it open in the market
Now, if the market feels like the oil is getting more valuable,
then my future contract will be bought at a higher price
and if it feels that the oil price is falling, then my future contract will be bought at a lower price
And who is the market here?
The investors, traders and common people who speculate what the price of oil will be
This is called a free market
This can be talked about and a philosophical discussion can be done on it
But basically, the price of my future contract will then get reflected in the benchmark
The benchmarks that I previously told you about
They basically denote the price of the future contracts and they keep fluctuating regarding it
Now, that the price of the oil has crashed into the negatives,
Talking specifically, the future contracts under WTI, in the month of May
It has become negative for that
It is still positive for the month of June
Obviously, the WTI benchmarks states an average cost of all the future contracts
The future contracts have dipped low only for the month of May
Because the investors and traders are viewing the situation today
The situation today is that there isn't enough space to store (oil) in Oklahoma
This is why they do not want to buy the future contracts for the month of May
This is why they are selling for the month of May and they feel that the situation will revert to normal in June
and the demand would rise slightly
And this is why the contracts of June are again in the positives
Another thing that you can conclude from this is that the oil price will not remain negative for long
This is being speculated
But some economists and experts believe that the explanation that I gave you here
as to why the oil prices have become negative
This is not a satisfactory explanation for this
Some experts believe that they are more reasons behind this
There have been some wrongs due to which they have become negative
Now there have been enough explanations. Lets talk about consequences now
What effect will the negative oil prices have on you and the rest of the world?
Let us talk about you first
Honestly speaking, there wouldn't be a lot of effect on the end consumer and a common man
However, observing ideally, crude oil is used to manufacture a lot of end consumer products
Petrol and diesel too, are dependent upon crude oil
So if the crude oil is running in the negatives, then all these things should become cheaper
Ideally
But this would not happen in reality
There is a very high probability that the government will not pass on any benefits to the consumers
The reason behind this is that there is a recession worldwide
The government might pass on a paltry benefit
But in my opinion, no such benefit will be passed on to a large extent
The government would try and offset the economic losses that are affecting the entire country
with the extra profit that the government makes here
And the same thing stands for companies as well. The big companies that manufacture consumer products
will manufacture at cheaper rates due to the cheap crude oil
But they will not pass on their benefits to the end consumer because
Same reason
They too, have had to bear losses due to the corona virus lockdowns
But in a broader sense, all the oil importing countries like Germany, Japan and even India
all have a huge advantage
The governments here can try to utilize and take advantage of the ongoing low prices of crude oil
If these countries try to improve their storage facilities
they could buy oil for cheaper rates and store it for later use
So this too would be a huge advantage here
This opportunity can be utilized in a good way
But the rest of the countries that produce oil are in a loss
especially, in the USA, where a lot of small businesses will shut down because they are incurring huge losses
due to such negative prices of oil
The same situation is in Canada too
From the perspective of the environment, this is both good news and bad news
Good news in the sense that the people who run the oil companies that are shutting down
might now think about shifting to renewable energy
and investing in clean energy
They would make more profits there and it is better than incurring losses here
But it is a bad news for the environment because oil would be cheaper
and so from the perspective of a consumer, petrol and diesel would become cheaper
petrol and diesel cars would become cheaper
So if crude oil becomes so cheap then no one would want to invest in renewable energy
There would be no economic incentive for electric cars and renewable energy
I hope you would have found this video to be informative
I don't think I have ever tried to simplify and summarize such complex information in a video before
If you failed to understand something, you can rewind the video and re watch it
and even then if you do not understand it, then research on your own the key terms that I have used in the video
You can search them and conduct your own research
If you liked it, then share the video
and you can support my work on Patreon.com/DhruvRathee
or by becoming a member on YouTube by clicking on the join button
so that I may continue to make such informative and educational videos for you in the future
We will meet again in the next video
Thank you
