US oil prices turned negative for the first time in history on Monday amid the deepest fall in demand in 25 years. A flood of unwanted oil in the market caused the West Texas Intermediate (WTI), the benchmark price for US oil, to plummet to almost –$40 a barrel after the fastest plunge in history. That meant producers were paying buyers to take oil off their hands.
The price of US crude has gone negative for the first time in history. How did it happen – and what does it mean?
regions, including the UK, oil prices are still above zero in part because theyface lower transport costs and easier access to ports. Still, no oil market has remained unscathed. The international benchmark oil price, known as Brent crude, is still above $20 a barrel, but has fallen by two-thirds since January to 18-year lows.
1. Why have US oil prices turned negative?
The price of oil has been steadily falling across global markets since coronavirus first broke out in China at the end of 2019. Since then, the shutdown of major economies and travel routes to curb the spread of the virus has wiped out oil demand as transport has ground to a halt. But oil producers have continued to pump crude from their wells, causing a catastrophic imbalance between oversupplied oil and the biggest slump in demand for 25 years.
2. What do ‘negative prices’ mean?
In short: oil producers are paying buyers to take the barrels of oil off their hands because storage facilities are full to the brim. At the market’s lowest point on Monday, an oil company might have paid about $40 for every barrel of oil someone was willing to take. A buyer would need to factor in the cost of transporting oil from the well to a shipping port, or a storage facility, where it may need to be held for up to six months, at significant cost. They would also need to bet that oil prices will rise later this year to make a return on the “investment”. No oil company wants to “sell” their crude at a loss, so many producers are likely to shut their wells until the market recovers.
3. Why are oil prices in other countries still above zero?
The world’s oversupply of oil is particularly acute in the US, which produces around 10m barrels of oil every day, because oil storage tanks have filled up, leaving oil companies desperate to sell their surplus barrels. In other regions, including the UK, oil prices are still above zero in part because theyface lower transport costs and easier access to ports. Still, no oil market has remained unscathed. The international benchmark oil price, known as Brent crude, is still above $20 a barrel, but has fallen by two-thirds since January to 18-year lows.
4. What does this mean for petrol prices?
Petrol prices are likely to fall sharply this year due to the sudden collapse of oil prices and the long road to market recovery that probably lies ahead. But it is worth keeping in mind that the price paid at the pump is not a perfect reflection of the oil markets because petrol and diesel prices include government taxes and a profit margin for the seller. The negative oil prices seen in the US will be short-lived, so no one should expect to be paid for filling up their car.
5. Are prices likely to recover?
Yes, and quite quickly. The negative US oil price referred specifically to the price for crude delivered in May, the month in which oil demand is expected to be lowest and supplies are expected to be highest. From Tuesday, oil traders will begin trading barrels for delivery in June in earnest, and these are expected to fetch far higher prices. A
meaningful recovery of oil market prices will depend on how quickly demand for transport fuels increases – a speedy end to lockdown would accelerate a market price recovery, but a slow emergence from the Covid-19 crisis could mean further financial pain for oil producers until 2021.
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