What’s Going On Here?

The price of a barrel of oil crashed to its lowest price since 1986 – and the reason might well be found in the “futures” market.

What Does This Mean?

• The 34-year low is partly down to:
  • the same falling oil demand that’s caused issues for weeks: falling demand that accompanied the coronavirus and a sharp increase in supply – Saudi Arabia’s price war-driven boost in oil production; and the discovery of the natural gas source (which can be used to produce oil).
  • futures contracts. 

a futures contract is an agreement to buy or sell a certain amount of oil at a particular price on a future date, ahead of real-world delivery. And for oil, that “future date” was the following day.

• That meant any producer that didn’t offload their physical oil this month would have to pay to store it until the next delivery date in June, whose prices are sky-high. So rather than face the additional costs, some producers immediately sold their oil at an even lower price.

Why Should I Care?

For markets: Speculate to accumulate.

• Some investors use futures to bet on the direction of oil. Those investors might’ve “rolled” their futures: sold their May contracts and bought ones for later, pushing down near-term oil prices even more.

The bigger picture: The biggest loser.

• Cheap oil is hard to ignore:
  • It could cause deflation if the prices of oil-based products tumble, which are a lot.
  • It’ll hurt the planet: after all, why would consumers buy new Teslas and businesses invest in renewable energy when the slippery pollutant is suddenly so much cheaper?

Content source: Finimize. (2020) All Scrude Up. Available at: https://www.finimize.com/wp/news/all-scrude-up/ [Accessed on Apr 21, 2020]