Crude being Rude on Global Market - goes negative

Talk of the town is Crude Oil Price plunges below zero to almost negative for the first time in an unprecedented wipeout making a big headline in the last 24 hrs in the oil industry.

Oil is a commodity, and as such, it tends to see larger fluctuations in price than a more stable investment like stocks and bonds. There are several influences on oil prices.  Let me outline a few that have caused an almost record hitting prices.

1. Demand

It started in China, where the first of billions of people around the globe began to shelter in place, to slow down the spread of the deadly coronavirus. By late March, billions of people were forced to stay home, fewer people were driving cars or boarding planes, factories were shut down, as a result, the world was burning less oil leading to declining in consumption.

Like any product, the law of supply and demand influence prices; a combination of declining demand and oversupply has put pressure on oil prices.

Demand for oil has declined by nearly half, jet fuel consumption plunged nearly 70 %. Meanwhile, the oil-producing company has been piling up oil with nowhere to go. Pipelines are filling, refineries and storage tanks are full with no extra drop to fit in, oil is been stored on massive ships around the sea.

2. OPEC

OPEC, the Organisation of the petroleum exporting company is the main influencer of fluctuation in oil prices. OPEC is a consortium that, as of 2020 is made up of 13 countries that control almost 80 % of the world supply of oil reserves. The consortium sets the production levels to meet global demand, as a result of the global pandemic when the demand was declining, OPEC refused to cut Oil Production, leading to the tumble in prices.

Supply and Demand Impact

 When Supply Exceeds Demand, prices fall. It is actually an oil future that sets the price of oil. A FUTURE CONTRACT is a  binding agreement that gives a buyer the right to buy a barrel of oil at a set price in the future. as spelled out in the contract, the buyer and seller of the oil are required to complete the transaction on the specific date. 

3. Saudi - Russia price war

In Early March, Saudi, and Russia could not come to terms with the new production cuts. Saudia Arabia turned on its taps, launching to price war against one-time

 ally Russia. The two sides later in March end agreed to cut supply by 10 million barrels per day, but by the time, prices were already down.

The US production continues to pump the oil even when prices fell. US production hit a record 13.1 million barrels a day.

4. Production Costs and Storage.

US companies were reluctant to slow down owing to borrowing in recent years for drilling well, building pipelines, and maintain a fleet of expensive machinery. With debt surrounding, they could not afford to stop pumping.

While Oil in the middle east is relatively cheap to extract, Oil in the USA and Canada in Alberta's oil sands is more costly. 

There are also ongoing concern that oil storage is running low, which impacts the level of investment moving into the oil industry, Oil diverted into storage has grown exponentially, and key hubs have seen their storage tanks filling up rather quickly.

5. Oil Shares under pressure.

Reliance Industries, ONGC, OIL INDIA, and other oil Stocks dive as US Crude future turn negative.

on 22nd April 2020, ONGC was trading over 6 percent lower at Rs. 69 and was the biggest loser on the Oil and Gas index. Gail was down 5 % and Reliance down 4%. Among Oil Marketing companies, Indian Oil Corporation (IOC) was down over 3 % while BPCL was down over 1 %. HPCL was down 1. 6%.

Overall pandemic virus effect and the Crude Oil Price was the only indicator driving the crash in the global markets.