23 April 2020

A Historic Post on Negative Crude Oil Price (20 April 2020)

Since this was such a historic event, how can we leave this out from our blog? On 20 April 2020, the US May oil futures contract went into negative territory for the first time in history and hit a record low on thin volume, ahead of next week’s expiration.

Why did this happen?
How about Malaysia?

First of all, the price here is referring to the May oil futures contract. Under a futures transaction, the buyer of the contract will be taking the delivery of oil when due. However, during such an oversupplied market condition currently in the US, the buyer would need to find storage for the oil that they are taking delivery. Unfortunately, there is little or no storage capacity now. Even if you found storage, the facility owner would charge a very high premium due to limited capacity.

So, if you were the buyer now, what would you do?

To avoid that, the buyer can close out or sell the contract. Yes. The natural reaction is to sell the contract. Of course, many buyers are thinking to do the same. Thus, significant downward pressure on futures price has just sparked off. Everyone wants to be the seller now.

But, why become negative?
Aiming to break the world's record?

Well, the -$37 here means that the seller is willing to pay the buyer, instead. Yup. The seller is the one paying here. The buyer in this scenario gets the oil + money. OMG @@!

Can this situation continue?

Yes. It's possible, especially when the futures contract is due for rollover. It depends on whether the oil market continues to be oversupplied. To recap, the OPEC+ production cuts would only take effect from May and many believe that the cuts are not sufficient due to the sudden significant drops in oil demand because of the Covid-19 lockdown.

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What does this mean for Malaysia?
Will Malaysians get FREE petrol soon?

Fyi, our petrol prices are referring to Brent crude price, not WTI. So long that Brent crude oil prices stay above zero, technically we won't get any free petrol.

Hope you enjoy reading this historic blog post.
Thanks for reading.

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