How Can Oil Prices Be Negative?

Oil prices can go into negative territory! It just goes to show what kind of impact negative sentiment can have on the market.
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Giles Coghlan
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Negative Oil Prices

Just taking a look at oil prices here. We can see that the oil prices have been continued to fall today.

Now, we had a good question here from Zack in the terminal. He asked, “Why would a seller pay a buyer to take their oil and what do negative oil prices mean?” That’s a great question. So, essentially, in the May contract, people were willing, to producers of oil were willing to pay people to actually take the oil off their hands.

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So, the reason they’re willing to pay people to take oil off their hands is that they can’t see a way of getting rid of it. So, it becomes so unattractive that actually the incentive for people to come is that they will be paid to actually physically remove the oil. So, that’s the reason for the negative oil prices. And what was those oil prices mean?

So, obviously, Anna was explaining earlier that they May contract saw the negative oil prices and the June contract is now falling heavily but still is positive at 14.85 dollars a barrel. But what do negative oil prices mean? Well, a number of things.

They mean, first of all, one day of negative oil prices is not going to change things fundamentally. It’s not going to completely damage the US energy sector but prices at this very low level and sub-zero prices are going to harm the reputation of oil as a commodity that’s safe. All those retail investors that piled into the oil contracts in recent weeks are going to be sorely have their fingers burned and so, it’s going to be a negative incentive for investing in oil and the biggest worry though, is this huge imbalance that we’re seeing in the supply and demand that underlies Monday’s flash crash.

To put it quite simply, there is just too much oil compared to how much oil is actually being used. I was looking at a Financial Times article, and the US is now producing on its own, two million barrels per day more than its actual refineries need.

They don’t have the available storage to handle the excess and so, this consumption has to leap higher to relieve this. So, as long as this imbalance remains, then, expect low and volatile oil prices. And, the May contract’s capitulation is ominous sign for a really deeply dislocated market and points to further downside in oil for June’s contract which is what we’ve seen from the outset of today.

So, this is also a big slap in the face for OPEC who are unable to address this imbalance and it’s an embarrassment for President Trump who tried to protect the US shale industry so it’s no surprise that we’ve seen their remark just out on the feed recently saying that President Trump will do all that he can to support the US oil industry.

So, that’s worth having a look at but that’s Zack, is an answer to your question, why sellers would pay a buyer to take their oil and what negative oil prices mean.

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