The oil and gas market is notoriously volatile, but amid COVID-19 it is more volatile than ever before with oil prices going negative for the first time in history on April 20, 2020. While the price drop has some consumers rushing to fill their gas tanks affordably, oil producers and investors are reeling. Louis Dickson, an oil analyst at Rystad Energy said, “It’s like trying to explain something that is unprecedented and seemingly unreal” when trying to process the 310% drop in price for the day.
What Went Wrong
The issue is largely driven by the COVID-19 pandemic. With people around the world on stay at home orders, individuals and companies are using far less fuel. Consumers are not traveling, and in most cases, they aren’t even filling up to go to work. Factories, airlines, and fuel-driven businesses are not buying fuel as their businesses are shuttered or their demand is falling short of pre-pandemic levels. In short, there simply is not a demand for the world’s oil.
When you pair a lack of demand for oil with the price war between Saudi Arabia and Russia right as COVID-19 was gaining momentum around the world, you end up with a surplus of oil. Not only did the world end up with more oil than it could use when demand was falling sharply, but we were also running out of places to store the oil we did have. The result was companies having to sell off oil for nothing, or even pay for the oil to be taken off their hands.
Additionally, those who do invest in and purchase oil kept pushing backs their delivery dates. For instance, oil that was purchased in January to be delivered in February might have been pushed back to a March delivery, then an April delivery. Problem is, most people still don’t want the oil in May, not even refineries want it. So, the investment keeps being rolled over. No problem, right?
Wrong. Tuesday was the last day to sell oil futures before they were delivered in May, so most people sold off because the oil simply was not needed. The result was a market flooded with more oil than the world could handle leading to a negative price point.
Could it Happen Again?
The answer is yes, oil prices could end up in negative territory again. The world continues to deal with a surplus of oil, demand is still lacking and there could be massive sell-offs again as June sell-off deadlines approach for investors.
Only time will tell how the oil industry and oil prices will fare. There are some signs of hope as regions of the world are beginning to get back to work, but will it be too little too late?
Continued Support Amid Crisis
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