Question

“US oil prices turned negative for the first time on record on Monday April 20th, 2020 after oil producers ran out of space to store the oversupply of crude left by the coronavirus crisis, triggering an historic market collapse which left oil traders reeling.” (The Guardian, April 20th, 2020) On April 21st, 2020 the US president Donald Trump tweeted: “We will never let the great U.S. Oil & Gas Industry down. I have instructed the Secretary of Energy and Secretary of the Treasury to formulate a plan, which will make funds available so that these very important companies and jobs will be secured long into the future!”

a. Plot the price of oil (crude or brent) for the past 12 months period and explain the decrease in the price by using demand and supply framework.

Answer 1

Following is the chart showing the price of oil for the past 12 months period.

As we can see the crude oil prices more or less hovered around $50-$55 for the past one year. However, as the Corona virus first started spreading in China in the month of Fedruary this year, the prices gradually started falling as the virus spread across countries around the world. Nearing the end of April, when most of the countries saw highest death rates from the virus, and the economies were shut down with literally no transportation taking place across the world. No refineries were left with capacity to store any more amount of crude oil. It was at this point when producers were ready to pay for storing their oil. This led the oil prices turn negative temporarily. Gradually economies have opened up across the world. Normalization of transportation has brought back the price of crude oil back to around $40 / barrel.