Question

In April 2020, the price of US oil has turned negative for the first time in history. https://www.bbc.com/news/business-52350082
Briefly explain how a negative occurs and what negative price in oil may imply for the oil market.

Answer 1

The price of oil has become negative because oil producers wanted buyers to buy oil as they were apprenhensive  that the storing capacity may become full in the month of May. Due to the pandemic there was lockdown, people did not venture out  and so demand for oil fell,Tankers were rented by oil firms to store the surplus oil This surplus supply of oil forced the price of oil to become negative.So negative price of oil occured because demand fell , supply was more and storage space was not available .

In the oil market with fall in demand and fall in prices, inventories will rise.Inventories will increase to 900 million barrels in the second half of the pandemic whereas the world has 1.5 billion barrels of storage.Francisco Blanch,a commodity strategist at Bank of America suggests " In a severe scenario, if the market struggles to find a home for surplus barrels ,then oil prices might have to trade down into the teens.".This will lead to recession.Thus if oil prices become negative it will not be possible to trade oil in the trading platform, but traders can go for certain assets that are connected closely to oil.In such case, traders will go for oil exchange traded funds or purchase inverse oil.