By Siddhant Kumar

Brent, the international oil benchmark, has dropped about 70 percent since the beginning of the year as the coronavirus continues to decrease demand. Its North American counterpart, West Texas Intermediate, for the first time in history has entered the negative territory wrong, a mark never seen before in the US oil industry. Many things led to the tipping point seen as WTI’s May contract expires, diminishing as low as $ 37.61. The coronavirus pandemic has caused a record crunch in China, the world’s largest importer of crude, entered a two-month shutdown to contain this outbreak. India, another key importer, is following suit as it keeps 1.3 billion people from being trapped. Opec’s failure to reach an agreement in early March with allies on output reduction and the expected flood of additional barrels into the market did not help the situation.

What do you mean by negative oil prices?

Negative prices occur when commodity sales marks fall below zero and trade-in negative. In such a case, manufacturers are expected to pay potential buyers for their output as they run out of storage space. While negative prices for oil were seen for specific crude grades in the US, it has for the first time had an impact on a major global crude commodity benchmark.

Has it Happened Before

Negative interest rates have become the norm in the Eurozone, where lenders pay interest to borrowers rather than charge them. Crude, a highly volatile asset, has never been associated with a negative price, but there have been variations in the past, with a rising trend for certain crude grades to fetch prices in single digits or lower. While the three-year oil price plummet began in 2014, the sour crude grade from North Dakota was priced at 50 cents per barrel before returning to $ 1.50. Prices for a particular, especially sulphurous, grades of US crude that are difficult to refine were still inclined to single digits. Prices for the Wyoming Asphalt Sour, a crude grade used for roads, were trading at 19 cents for a single barrel in mid-March, reflecting wider gloom for the market.

Other Examples

US fuel prices have been negative in recent months, as infrastructure development such as pipeline capacity has failed to get that output. The US shale boom has elevated the country to the world’s largest producer of oil and gas. But with insufficient volume, the share price in Texas dropped below zero to $ 4 last summer. Permian gas prices just fell in the negative at the beginning of the year as gas transmission infrastructure remained inadequate. In January, the April contract was assessed at negative 2 billion cents by British Thermal Units, said S&P Platts, who is of the view that May is expected to reduce significantly.

Why would Crude suffer similar consequences?

There is no shortage of supply amid an additional outbreak of nearly four million barrels a day of fullness coming to market in April. Saudi Arabia and the UAE have promised to bring 12.3m BPD  (barrels per day) and 4m BPD of crude, respectively, to the market. With a massive boom in the fall of demand records around 22m BPD in April, according to Trafigura data, producers will struggle to find storage.

Saudi Arabia has moved on quickly to park crude in Egypt to supply markets in Europe but North American shale players are likely to carry it hard as there is not enough capacity and WTI, unlike Brent, involves physical delivery of crude. The final volume could be run out by mid-May, according to analysts. Continuous feed supply during storage capacity can turn a negative price trend into a continuous measurement reality.

How does it affect the economy?

Oil prices do have an impact on the U.S. economy, but it goes two ways because of the diversity of industries. High oil prices can drive job creation and investment as it becomes economically viable for oil companies to exploit higher-cost shale oil deposits. However, high oil prices also hit businesses and consumers with higher transportation and manufacturing costs. Lower oil prices hurt the unconventional oil activity, but benefits manufacturing and other sectors where fuel costs are a primary concern. The U.S. economy can take a lot of hits and keep on going because so many sectors contribute to it without any single dominant sector. The same can’t be said about some other oil-producing nations like Russia or Venezuela whose fortunes rise and sink with the price of oil. In short, the U.S. economy has the room to adapt to prolonged periods of high or low oil prices. This means it takes more than just low oil to shake the U.S. economy, but it is not uncommon for oil prices, high or low, to increase the impact of economic shocks.

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