Report: For the first time in history, US oil prices drop below $0 a barrel

Anyone trying to sell oil must now pay the buyer more than $30 for each barrel
by Leandre Grecia | Apr 21, 2020
PHOTO: Pixabay

Fuel prices the world over are starting to drop quickly, thanks in no small part to the COVID-19 pandemic that’s forcing people to stay indoors. While that may seem like a good thing for us consumers, there’s really nothing pretty about the current oil situation on a larger scale.

Transport operations (land, air, and sea travel) are limited, and only a handful of private vehicles are currently moving around the world’s biggest cities. This has caused a massive surplus in crude oil, and for the US in particular, this has resulted in oil prices falling into negative territory.

According to a report by The New York Times, oil in the US was selling for over $60 a barrel at the start of 2020, but dropped drastically to just $20 a barrel by Friday, April 17. Now, that figure has dropped yet again, this time by more than $50, which means oil prices are currently at a negative. That also means traders now need to pay their buyers more than $30 for each barrel they want to unload.

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A different BBC report says this is the first time in history that something like this has happened. But just how did it come about exactly? Well, it’s more than the simple surplus we mentioned earlier. Oil is traded based on futures contracts, which is a legal agreement to buy or sell a certain commodity for a predetermined price at a specific time in the future.

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The futures contract that’s requiring buyers to acquire oil barrels in May is expiring today, but that doesn’t necessarily mean manufacturers are going to stop production. Now, with this massive surplus of oil and the foreseeable future being a bit blurry due to the global pandemic, said manufacturers have to deal with the problem of storage.

Nobody wants to hang on to more crude oil they can’t move, so producers are looking for other ways to unload their goods due to fear of storage capacities running out entirely.

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“If you are a producer, your market has disappeared, and if you don’t have access to storage you are out of luck,” IHS Markit vice president for energy oil market services Aaron Brady told The New York Times. “The system is seizing up.”

According to a CNN report, the June contracts have only dropped to $22 a barrel, and the world benchmark Brent crude fell by just 5% to $26.50 a barrel, but this isn’t necessarily a good thing. Experts say that a lot of companies won’t be able to survive this collapse in the industry. Hundreds of production companies in the US are expected to file for bankruptcy by the end of 2021 in a market with oil selling for even $20 by the barrelwhat more if that price falls any lower?

The negative oil prices won’t necessarily mean price drops in fuel, however, especially here in our market. If anything, the surplus may even cause fuel prices to go even higher, because local oil and fuel companies may find themselves in similar situations like those in the US—they might also need to pay more just to store the extra supply. This immediately translates as additional overhead costs for them, which will then affect prices at the pump.

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Then again, the coming months are still uncertain owing to the COVID-19 outbreak—we still can’t say how much deeper these oil prices will fall and when they will normalize, as well as how this will directly impact the Philippine market. One thing’s for sure, though: The longer the pandemic and the oil crisis last, the uglier the situation will get.

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PHOTO: Pixabay
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