Crude oil plunges below zero for first time in unprecedented wipeout

  • Why have US oil prices turned negative?

  • What do ‘negative oil prices’ mean?

  • Why are oil prices in other countries still above zero?

  • What does this mean for petrol prices?

UPSC Can list these questions under

GS paper 2 (Effect of Policies and Politics of Developed and Developing Countries on India )

What is the context about?

  • US oil prices turned negative for the first time in history on Monday amid the deepest fall in demand in 25 years.
  • A flood of unwanted oil in the market caused the West Texas Intermediate (WTI), the benchmark price for US oil, to plummet to almost –$40 a barrel.
  • That meant producers were paying buyers to take oil off their hands.

Why have US oil prices turned negative?

  • The price of oil has been steadily falling across global markets since coronavirus first broke out in China at the end of 2019.
  • Since then, the shutdown of major economies and travel routes to curb the spread of the virus has wiped out oil demand as transport has ground to a halt.
  • But oil producers have continued to pump crude from their wells, causing a catastrophic imbalance between oversupplied oil and the biggest slump in demand for 25 years.

What do ‘negative oil prices’ mean?

  • In short: oil producers are paying buyers to take the barrels of oil off their hands because storage facilities are full to the brim.
  • At the market’s lowest point, an oil company might have paid about $40 for every barrel of oil someone was willing to take.
  •  A buyer would need to factor in the cost of transporting oil from the well to a shipping port, or a storage facility, where it may need to be held for up to six months, at significant cost.

Why are oil prices in other countries still above zero?

  • The world’s oversupply of oil is particularly acute in the US, which produces around 10m barrels of oil every day.
  • Thus oil storage tanks have filled up, leaving oil companies desperate to sell their surplus barrels.
  • In other regions, including the UK, oil prices are still above zero in part because they face lower transport costs and easier access to ports. Still, no oil market has remained unscathed.
  • The international benchmark oil price, known as Brent crude, is still above $20 a barrel, but has fallen by two-thirds since January to 18-year lows.

What does this mean for petrol prices?

  • Petrol prices are likely to fall sharply this year due to the sudden collapse of oil prices and the long road to market recovery that probably lies ahead.
  • But it is worth keeping in mind that the price paid at the pump is not a perfect reflection of the oil markets because petrol and diesel prices include government taxes and a profit margin for the seller.
  •  The negative oil prices seen in the US will be short-lived, so no one should expect to be paid for filling up their car.