Why did oil prices drop below $0 for the first time in history?

Why did oil prices drop below $0 for the first time in history

Oil futures contracts were traded below $ 0 for the first time on April 20, 2020. What could be the reason for this collapse in crude oil futures contracts with more than 300% depreciation?

What is the reason?

Petroleum, like other mines, is not a commodity that you can take out when you want and stop production when you want. If the oil wells do not pass through it like most other wells, it collapses into itself and your drilling well closes. Therefore, production must continue, albeit at a minimum. If the well collapses/closes, it needs to be reopened, which requires a high cost.

1 month “CFD” contracts are signed for commodities that are produced in this way. More precisely, contract papers are offered for sale at the price requested by the oil producer. Refineries promise that they will take oil physically with these contracts, and at the end of the contract they are obliged to take all the oil and deliver the money.

What is the current situation?

There is no refined oil consumption, as most airlines, land traffic, energy companies and production have stopped. So, there is no space for refineries to produce. So far, refineries have gone through production and stocking, but the stocks are completely full, and we have returned to the top of the chain: the extraction of oil from the oil well.

Oil producers say, “It is the end of the month, give me your money and buy your oil.” “I can’t take a seat,” says the refineries. “I don’t know if you will take it, the contract is like that,” says the manufacturer. The refinery is returning to the free market and says, “friends, I made such a contract, now I give this contract free of charge to anyone who wants it. Even if anyone wants, I will give money to me. Take this contract from me. I have no place to store oil.” In other words, the current crisis consists of refineries trying to give the oil contracts to someone else for free to waive the transportation and storage costs.

Possible consequences

Oil wells will be closed in one way or another in the coming months. Even if production continues at this capacity, consumption and storage will still be a problem. So, at some point, oil companies will stop production and close oil wells for the sake of putting themselves in harm. The refineries, which have hundreds of barrels of worthless contracts that have expired money but not received, will receive the worst blow. Similarly, airlines and energy companies that make contracts affiliated with refineries will take the second blow.

When the demand for oil starts again after a point, it will be necessary to drill again and establish a facility to reopen the wells, which will increase the cost of the oil again. With this increase, Saudi Arabia and Russia will increase their oil prices and oil will start to rise again in the world. This is again in the long term, energy, transportation, etc. will cause prices to increase in the sectors. What about BP share price and oil price in the coming days? We’ll wait and see.

Source: eksisozluk.com