US Crude Oil Prices Falls Below Zero, How Does It Affect You?

For the first time in history, US crude oil futures turned negative on Monday, slipping below zero as as demand for energy continues to fall amid the COVID-19 outbreak and traders sought to avoid owning crude with no place to store it.

Stocks were also dipping on Wall Street in afternoon trading, with the S&P (measures the stock performance of US) 500 down 1.2% and the US crude for May delivery slumped to negative $35.20, as of 2:30 pm.

It was nearly $60 when the year commenced, before businesses were shut and factories and automobiles were idled.

How Did This Happen?

Oil prices have been slipping steadily across world markets since the pandemic first broke in China's Wuhan late last year and engulfed the world.

The shutdown of major economies and travel services to curb the spread of the virus led to a drastic collapse in oil demand. However, oil producers have tried to extract crude from their wells which resulted in a tragic imbalance between oversupplied oil and the biggest plummet in demand for 25 years.

This steep fall in oil price is due to an elevated supply amid lack of sufficient demand which has fallen so much that facilities for storing crude are nearly full.

Tanks could reach their maximum capacity within three weeks, as per the Chris Midgley, head of analytics at S&P Global Platts. Due to lack of sufficient storage of excess oil, producers are willing to pay buyers to take the barrels of oil and transfer the burden of storing it.

"Basically, bears are out for blood," analyst Naeem Aslam of Avatrade said in a report.

How Does It Affect Regions?

The US Energy Information Administration last week said that storage at Cushing, Oklahoma, quite famously known as the heart of the US pipeline network, was nearly 72% full as of April 10.

US produces 10 million barrels of oil every day. However, this oversupply of oil is now severe as storage tanks have reached their brim leaving oil companies desperate to get rid of their surplus barrels.

Oil prices in other regions are still above zero due to lower transport costs and better access to ports. Brent crude, the international benchmark oil price, is still above $20 per barrel but has dropped by two-thirds since January to an 18-year low.

Benchmark U.S. crude oil for June delivery shows a more "normal" price, slipped from 16.5% to $20.90 per barrel. Big oil producers have announced cuts in production hoping of balancing supplies with demand.

Road To Recovery?

A recovery in oil market prices helps identify how quickly demand for transport fuels increases.

If the COVID-19 lockdown comes to an end soon, it would accelerate a market price recovery. However, an even worse financial pain for oil producers is expected if there is a slow recovery from the pandemic.

Even if the demand goes back to its usual, it would take a lot of time to get rid off all the stored or excess crude.

"What the energy market is telling you is that demand isn't coming back any time soon, and there's a supply glut," Kevin Flanagan, head of fixed income strategy for Wisdomtree Asset Management, New York said.

What Is The Impact On Petrol Prices In India?

Petrol prices may drop sharply this year due to the sudden fall in oil prices and the road to economic recovery that lies ahead.

However, the price customers pay at the petrol pump does not get affected by the oil markets conditions as petrol and diesel prices include government taxes and a separate profit margin for the seller.

The price of a litre of diesel still remains at 62.29 and that of petrol stands at Rs 69.59 per litre, as per data available on the Indian Oil Corporation website.

On Tuesday, petrol in Mumbai was being sold for ₹76.31 a litre, while diesel was at ₹66.21 per litre.

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