NEWSMAKER: The barrel of oil A crude awakening

For the first time, in a worrying sign, oil futures fell into the negative territory

What strange times we live in. Unprecedented. Unsure. Where givens are turned upside down.

Yes, coronavirus is one element. But a time when commodity traders will pay you to take oil

their oil. A fuel without energy, a commodity without value, a baseline index worth less than if

every barrel of oil stayed put in the ground.

There are memes now of drivers who go to petrol stations to fill up their cars and are given a

tanker truck of fuel in return.

So what has happened this past week? Why has oil, which five years ago would cost you

$127 a barrel is now worth, in the case of West Texas Intermediate (WTI) $30 a barrel.

Commodity dealers will pay you to take the stuff off their hands.

There are tankers laden with the stuff anchored off most major ports, there are storage facilities

that are bursting at the seams with it, and there are commodity deals who would fill every pot

and bottle if they could and hide it away in mines until such a time as crude rises.

So what has happened this past week? Why has oil, which five years ago would cost you $127 a

barrel is now worth, in the case of West Texas Intermediate (WTI) $30 a barrel. Commodity

dealers will pay you to take the stuff off their hands.

Storing oil in vast quantities

Of course, nothing is as simple as it sounds. And no, unless you've got some form of storing oil

in vast quantities, like tanks, trainloads of tankers cars, or a fleet of oil tanker vessels does this

price apply.

In a nutshell oil is cheap, there's lots of it, and no one is using it.

If you want to sound intelligent during this lockdown or the next time you're on a Zoom call and

the topic comes up, use can explain the collapse something like this: Remember that basic law of

supply and demand?

The more something is in demand, the higher the price. Or the more people demand something,

the higher the price. Now turn that price dynamic on its head. There's a supply that no one wants

the price falls. And when no one wants it, the price falls.

And when you only have a limited room to turn off the supply, the price falls. And when you're

running out of room to store it, the price falls.

That's what's happened

That -$30 price is being offered by sellers right now for oil to be delivered in May. The May

futures price the price for delivery then was set on April 21 and it was influenced by a one-

third decrease in demand for fuel.

Factories are mostly shut around the world, planes aren't flying, cars aren't being driven and

in the northern hemisphere, homes don't need to be heated.

That means there's much less demand. And prices go down.

In the US, which has become mostly self-sufficient in oil because of the growth in fracking over

the past decades, storage facilities are full. But fracking is a costly way of getting oil both in

terms of the environment and economics.

As long as it's worth their while, frackers keep producing but store their excess product for a

time when the prices are higher and when demand requires it. But storage tanks are full.

Full storage tanks forces the price down in a big way. And when those tanks are full, the traders

need to find other ways storing the excess. And the most cost effective way of doing that is to

drive the price lower.

Not just about storage

But of course, this isn't just about storage.

For the past two months, Saudi Arabia and Russia behemoths in the oil producing world

have been engaged in a standoff.

Let's go back to early in 2020 when the pandemic was just beginning. Oil was already falling

in price because the global economy had been starting to slow.

Slowing economy means lower oil prices. And the Saudis wanted to cut production further to

keep prices stable. The Russians adamantly disagreed they wanted to produce more. Opec,

(currently, the Organization has a total of 13 Member Countries.) members and others were in disagreement

on what to do.

In December 2019, oil was at $67 a barrel. In January, it was $63, and in February it was at $56.

And by early March, it was at $36. And that's when Saudi Arabia decided to open its taps,

adding another 2.6 million barrels daily to the market.

But why flood the market when prices are lower? Well, that's when production costs really come

into play.

The Saudi's can bring a barrel of oil to the market with all costs paid at around $8.98 each,

Russian costs are $19.21, and shale producers have costs of at least $25 per barrel.

Within days, oil started to tumble, down to the mid $20s cheaper for buyers in Europe,

Russia's primary market to buy.

The price war was on

Along came the coronavirus. (COVID19)

No one is driving, no one is working, no one is flying. No one is heating homes or using much

energy or it comes from power from renewable sources. No one is buying much oil. And the

price drops.

Even things are stable on the geopolitical front no threats to global oil supplies because

everyone is too busy staying safe from Covid-19.

So when earlier this week the price of oil fell into negative territory, it's because there was no

room to store stuff being ordered for delivery in May.

WTI is based on delivery from one place Cushing, Oklahoma, where oil is moved to from

across America and stored for physical delivery.

That's the price that has collapsed.

No, those memes where you drive away with an oil tanker for filling your car are tautology.

Governments draw a lot of money into their coffers from excise duties on fuel so most drivers

won't be paying much less at the pumps.

But with oil so low now, it's a clear sign of the economic woes still facing us at the end of this

pandemic.

The students are required to answer the following questions.

1a. Considering the present case "Examine the law of demand supply".

1b. Read the case and evaluate the reasons for the low price/or negative prices of the oil

1c. Examine the impact of COVID19 on oil market.

2a. COVID19-impacted locally and internationally, on local and global economy.

5. Give your opinion on the "Post COVID-19" impact on the economy.