Negative Oil Prices – Reality or Illusion ?

Oil prices are determined under the free market equilibrium meaning that oil prices are determined by demand and supply . Due to global pandemic , supply is more than demand and hence the prices of oil have fallen. 

Oil market doesn’t fully operate like this as most of oil supply is controlled by OPEC (Organisation of Petroleum Exporting Nations) which is a cartel of oil producing nations. On the other hand, demand for oil is governed majorly by gasoline for cars and airline travel to electrical generation.

In 2019, US was the world’s largest oil-producing country with more than 12 million barrels per day. But OPEC produces 42% of the world crude oil output . Although , OPEC is price leader but US has put a limit to cartel’s pricing power.

Does crude price differ for OPEC and US?

The answer is yes . OPEC uses Brent crude price which is the international benchmark price while US uses WTI ( West Texas Intermediate) which is a bench mark for US oil prices.

Brent crude is produced near the sea and it is easier to pull into ships and is relatively priced lower than WTI  as it is produced in landlocked area in Oklahoma , US where the storage capacity is also limited. 

The price of oil is determined in the futures market. An oil futures contract is a binding agreement that gives one the right to purchase oil by the barrel at a predefined price on a predefined date in the future. Under a futures contract, both the buyer and the seller are obligated to fulfil their side of the transaction on the specified date.

Due to pandemic there is a fall in global demand and limited storage capacity ,the prices of American oil futures contract have plunged below zero at negative $ 4.47 per barrel for the first time and this implies that companies have to pay to buyer to take oil from them. 

The prices of oil for the end consumer is not negative but surely American consumer would be saving on the fuel expenditure if conditions permit them to step out in the month of may.

PS : The information given in this article is based on news articles and websites.

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