The price of a barrel of the benchmark U.S.
oil plunged below zero dollars a barrel for the
first time in history on April 20
The U.S. crude futures for May plunged that
day to minus 37.63 dollars a barrel
This is a decline of around 305%, or 55.90
dollars a barrel
Demand for fuel has reduced by 30% worldwide
due to the coronavirus pandemic which has
forced billions of people to stop traveling
Supply of fuel has been far above demand
Because of the oversupply, storage tanks are
becoming full and it is difficult to find space
A negative price hence means that producers
are paying money to get the fuel stock
out of their hands
While this fall in demand is key to understanding
the fall in price, how oil is traded is
also a factor in this
Oil is traded as futures contracts at the
New York Mercantile Exchange
The sellers of such futures will have to deliver
the oil at the contracted price in the contracted
month just as buyers will have to take delivery
at the contracted date
As with all trading in commodities, there’s
a huge speculative participation
in oil futures trading too
Speculators have to exit from their “positions”
before the contract expiry date. If they fail
to do so, they will have to take actual physical delivery of the crude oil on the contracted date
Speculators who had taken large bets on May
futures began to unwind their “positions”
on April 20. This was because the futures
contracts for May were set to expire the next day
The need to exit the contract in the weak
market led to the massive fall in prices
Major oil-producing nations have now agreed
to cut output and global oil companies are
trimming production
But it remains to be seen if those cuts will
come quickly enough to avoid a massive clog
