By Brendan Ellich
The markets have experienced extreme volatility in the past few weeks. Along with this, the market for oil has plummeted to levels never seen before.
In this article we will break down the timeline of oil’s collapse.
We are in unprecedented times. The majority of people around the world have been put into lock down, with most businesses reducing production levels. As a result, transport and manufacturing has decreased drastically – in the US, manufacturing PMI fell from 48.5 to 36.9 points in the April quarter. This has put major pressure on oil prices as demand decreased whilst supply was steady.
Saudi Arabia v Russia
On March 8th, 2020, Saudi initiated a price war with Russia in response to their refusal to cut oil production. Consequently, this made crude oil fall 26% and Brent oil fall 24%. The supply cut of 9.5 million barrels of oil was eventually agreed upon on April 3rd when Putin issued a meeting with OPEC.
Was this enough?
Why prices went negative.
If you search up ‘oil’ on the internet you will be bombarded with information about a barrel of oil costing only -$40.32.
So why did this happen?
The contracts for oil were expiring on 21st April. As a result, investors had to sell their futures contracts; the only issue was no one wanted to buy it. This made prices plummet 320% until an equilibrium could be met – something that has never happened in the history of oil.
What does this mean for businesses?
Clearly no one is buying oil, as oil storage is higher than ever.
For many companies that use oil for daily manufacturing, there would be little effect on production. On the other hand, companies that work specifically with oil such as OilSearch (ASX: OSH) and Woodside Petroleum (ASX: WPL) will see massive reductions to revenue since it is cheaper to buy oil than a Big Mac.
With all these events happening around the world it is hard to tell how negative oil prices will affect the business sector overall. However, one thing is known – this is a historical movement for commodities which we will unlikely ever see again.
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