Monday 20^th April 2020, marks a day in history for the US oil price as the price per barrel closes at a negative value, as the knock-on effects of the coronavirus pandemic continue to hamper the world’s economy.

The West Texas Intermediate (the US Crude Oil Marker) priced the May delivery of oil at a minus figure. This is the first time since the contract began, back in 1983, that prices have presented negative figures. As of close Monday 20^th April 2020, the WTI were pricing barrels at -$37.63… the Friday prior, the same product was valued at $18.27. This has resulted in the bizarre situation of oil producers actually paying buyers to take oil off their hands as available storage space becomes increasingly limited.

These unprecedented scenes have been a direct cause of the global Coronavirus outbreak. With all of the worlds macroeconomies participating in some form of lockdown, this has dramatically reduced the need for crude oil globally. Quite simply, as individuals are limiting motor vehicle use and companies are scaling back production, it has meant that demand for the fossil fuel which, fuels the worlds economic activity, has diminished.

Coronavirus cannot solely be held accountable for Monday’s dismal showing for US Oil prices- there is currently a price war. Another huge factor is that Saudi Arabia has been hiking up oil production due to a fallout with Russia. This spat has resulted in the market to be flooded by oil, thus exacerbating the (over)supply issues. Since the original falling out, an OPEC-backed deal to cut global crude oil production by 10% has yet to cause a significant impact to the oil market. This is a prime example, illustrating the economic law of “Supply vs Demand” and how too much supply and not enough demand reduces a commodities price.

Whilst unnerving, Monday’s dramatic decline could well be an anomaly. Whilst oil prices having been falling over the recent weeks, the plunge on Monday could be accredited to technicalities of trading.

It is commonplace for traders to buy and sell with contracts for barrels of oil- they will buy the right to purchase a set number of barrels at a specific date – only to sell later on, preferably at a higher price. Upon expiration of these contracts, whoever owns them are obligated to take delivery of the barrels. Usually, traders would have no issues with selling these contracts close to their deadline, however, amidst the current economic gloom, traders have had a tough time selling the contracts- the deadline for the May contracts was Tuesday 21^st 2020. This meant traders on Monday had a last ditch scramble to get rid of their barrels as they would have no way to collect and store. This had resulted in traders paying people to take the oil off their hands, resulting in oil prices traded at a negative.

Now, unfortunately, this does not mean that we should all rush to the nearest petrol station for free fuel as this collapse is unlikely to lead to huge discounts at the pump for consumers. Nevertheless, the downturn experienced on Monday has had an affect on the other leading oil index, The Brent Crude Oil Index, as it is currently at an 18-year low.

This dramatic drop just highlights the disruption the Coronavirus pandemic is having on the global economy and how quickly things can change. As clients, be assured that we are continuous working alongside our investment professional connections to ensure that your investments continue to stay up to date, and ultimately continue to meet your objectives.

Should you want to discuss this in further details then please do not hesitate to contact your Adviser.