What Negative Oil Prices Mean and How the Impact Could Last - Press "Enter" to skip to content

What Negative Oil Prices Mean and How the Impact Could Last

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A main benchmark for the price of oil fell negative for the first time ever this week. The decline —  more than 300 percent in daily trading — raised fresh questions about the damage the coronavirus is having on the global economy.

A benchmark price for a barrel of oil to be delivered next month fell to -$37.63 on Monday, which means that a seller would have to pay someone that much to take it off their hands.

But that historic plunge was exacerbated by a quirk in how the oil markets work.
The negative price only concerned contracts for delivery of barrels in May that are traded on so-called futures markets. At the same time trading happens for May deliveries, people trade on contracts ending in June, July and so on.

Demand for oil has collapsed in recent weeks as the coronavirus pandemic has devastated practically all corners of the economy, eliminating much of the need for fuel to ship goods, ride on airplanes or commute to work. Without a use for it, the world’s biggest producers — the United States is high on that list — is running out of places to store all the oil that companies have continued to pump out of the ground.

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As a result, traders this week were willing to pay to get rid of oil rather than figure out how to keep storing it. The May contracts that fell so much end on Tuesday. (The price of the June contract is still in positive territory, though they have fallen a lot in recent weeks, too.)

The price of gas has been precipitously falling around the United States in the last few weeks as the oil industry has been jolted. The national average price of gas was $2.48 as of Monday, a 67 cent drop from a year ago.

But crude oil is only the raw material from which refineries make gasoline, diesel, jet fuel and other products. And the price of crude — even if it’s negative right now — only accounts for a fraction of the cost of the gasoline or diesel you put in your car or truck, according to the Energy Information Administration.

It costs companies like Exxon Mobil and Royal Dutch Shell, which employ tens of thousands of people around the world, a lot of money to refine oil and transport it to gas stations. In addition, federal, state and local taxes account for about one-fifth of what you pay at the pump in the United States. Taxes can make up a much greater share of the price in many European and Asian countries.

This has never happened before, and experts do not expect prices to stay negative for days or weeks. Demand for oil will likely remain tepid for months because few experts believe the economy will quickly rebound to where it was before the pandemic.

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But the low prices will also put pressure on oil companies and countries like Saudi Arabia and Russia, huge producers, to pump less oil because they themselves will run out of room to store it. That should, over time, help lift prices — or at least slow down declines.

No, you can’t. The contract for oil traded in the United States is for delivery of oil at Cushing, Okla., a critical storage hub where lots of oil pipelines converge.

In addition, each contract is for 1,000 barrels of oil, or about five tanker trucks worth. Even if you had a place to park five tanker trucks filled with oil, you would be hard pressed to find a trader willing to sell you a single contract. Most trades are for many times that amount.

Monday’s abnormal fall in prices was a reminder that the industry — and for that matter, the world economy — has changed a lot since the last oil crisis. For one, the United States is now one of the biggest producers in the world, and the country has in recent years been pumping out crude oil as fast it can.

The steep rise in output has outpaced the world’s need for energy, a problem that is magnified by the coronavirus.

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What’s not know is how long this slowdown last, as well as the long-term consequences of an economic recession, and if that will fundamentally change how much oil the world needs.


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