For the first time in the history of trading US crude, West Texas Intermediate, its benchmark, is trading in negative territory.
As of 8:22pm on Monday, US WTI was trading at $-37.45 per barrel according to prices displayed on Bloomberg energy terminal.
While this is not good news for oil-producing countries, here are a few questions to help you better understand the situation.
Q: What does trading in negative territory mean?
A: A simple way of explaining it is that traders will pay their customers for patronising them
Q: Is this a good thing?
A: No, it is not. Traders and oil exploring companies are running at a loss. It also means that there is no storage space to store excess production.
Q: Will this price be the same across the entire industry?
A: No, the negative price is only for US crude. Also, it only applies to May futures as the contract for June delivery is still at $22/barrel and July is at $27/barrel.
Q: Futures? What does that mean?
A: In the crude oil industry, refiners and other buyers can pay ahead for crude that would be delivered at a later date. Thus, some of the May futures would have been sold earlier in the year for as high as $50 or $60 if the customers negotiated or paid in January.
Q: So oil is not valueless yet?
A: No, it isn’t
Q: So how does this affect other producers?
A: This would serve as a warning for the Organisation of Petroleum Exporting Countries (OPEC) of how bad the demand problem has gotten.
Q: So what about the price of Nigeria’s crude oil?
A: Nigeria’s crude oil is benchmarked against the Brent crude. At present, the price of a barrel of Brent crude is $25. Although traders in the market said Nigeria’s Bonny Light was sold for between $13 and $15 recently, the price is not yet in negative territory.
Q: Will this blow over?
A: It is expected that the global economy will rebound gradually once coronavirus-induced lockdowns are lifted and activities resume
(The Cable)
