What if oil prices stay low

Why the oil price is going crazy

What happened in the oil markets?

Oil prices had already fallen drastically in the past few weeks due to the Corona crisis. There was also disagreement between the OPEC cartel and other oil-producing countries. Now, at the beginning of the week, certain contracts for the delivery of oil have become due. It's just that the warehouses are full - so there were no or too few physical buyers. That pushed the oil price for American WTI oil into negative territory on Monday evening.

How does the price come about?

Oil prices are primarily based on the principle of supply and demand. Therefore, with the global economic standstill caused by the pandemic, there is no demand and prices are literally falling into the abyss. Companies are ordering less oil, airlines are leaving their fleets on the ground and consumers are staying at home and driving less.

Which oil contracts triggered the price shock?

These are so-called forward transactions for the month of May, which expired on April 21st today. That means, whoever has the contract in hand on that day, owns the associated oil delivery. This flows into existing oil reservoirs - and you have to pay to use them. Delivery is now to take place in May, but the oil reservoirs are already full. The price of the remaining memory increases. That's why investors fled the contracts: They didn't want to burn their fingers. The papers became worthless almost instantly and even fell into negative territory.

Still being flared: Oil field in Saudi Arabia

Is the crash the work of speculators?

Yes and no. Forward contracts can be attractive to speculators. Simply put, they are future price bets that can be won and lost. In this case, the speculators involved have gambled themselves thoroughly. However, many companies have to secure their business on the raw materials market. The commodity futures, which are also available for wheat and coffee beans, for example, serve this purpose. They basically offer reliable and calculable prices for the future. Only in this situation hardly anyone wants the physical oil that is intended for delivery in these contracts.

Why did the crash only hit American WTI oil?

WTI oil has the property of being stored in a fairly one-dimensional manner. Because the pipelines end in Oklahoma. The world's largest oil storage facility is located there and deliveries are made there. In the warehouse district of Kushing, however, the warehouses are already well stocked. The remaining storage unit now costs around ten dollars per barrel. And the price will presumably continue to rise. The European North Sea variety Brent has more delivery alternatives.

Why not just shut down oil production?

Basically, oil wells are more or less under pressure. Once pierced, the lubricant of the global economy flows. It is particularly difficult to stop production in the fracking technology in the USA, which is controversial from an environmental point of view. This is one of the reasons why oil tankers are currently being used on the world's oceans - they serve as floating oil reservoirs.

If you could drive a car it would be pretty cheap right now ...

What are the consequences for oil companies?

They are increasingly in trouble if prices remain so low. This in turn can then become noticeable in the form of loan defaults and unemployment. In the USA, the entire fracking industry is on the brink of collapse with low prices. Because here observers expect that the companies need at least a price of 50 dollars per barrel in order to make ends meet.

Why is Trump buying oil now?

To put yourself in the limelight. The US president has announced that he will buy 75 million barrels to support prices and replenish national reserves. The only difference is that global demand per day is similar. Donald Trump's action is at best a drop of oil in a hot stone. The agreement between OPEC and other oil states such as Russia to reduce production by 10 million barrels a day is more effective.

However, most experts believe that this is nowhere near enough to compensate for the drop in demand. In any case, oil-producing countries like Saudi Arabia and Russia are coming under increasing pressure because they finance most of their national budgets from oil revenues.

What does all this mean for petrol and heating oil prices?

Unfortunately not much. Because in this country the share of taxes and duties in the oil price is well over half. The European oil type Brent also fell drastically at the beginning of the week, but is still around 21 dollars per barrel. The prices for heating oil and at the petrol stations could at least fall somewhat with a delay at these lows.