Negative oil futures: How low will petrol prices go?

author-avatar By
on April 21, 2020
Negative oil futures: How low will petrol prices go?

Photo by Bryan Pelayo on Unsplash

Oil futures have gone into negative territory for the first time, but the effects at the petrol pump could be hard to see.

Let me explain something first.

Cushing, Oklahoma. You've probably never heard of it, but in that town of 8,000, there's a huge crude oil storage facility, and it's full to the brim.

This is because OPEC decided to ramp up its oil supply at a rather unfortunate time - right before coronavirus hit.

That glut of supply, as well as reduced demand due to COVID-19, has caused oil prices to crash, and since Cushing is a key storage facility, traders are having to offload their barrels of oil.

The oil futures price crashed Monday by 306% on the NYMEX - the New York Mercantile Exchange - a market where commodities such as crude oil, coal, and electricity are traded.

It's important to note that a barrel of oil is still priced in the positive territory  - it's the oil futures that fell drastically.

A future is essentially an agreement between two parties to sell/buy 1,000 barrels of oil at a certain date - it's a bet on the future price of oil, and it also means traders don't need to physically trade barrels, but if they lose on the contract, they have to store the barrels.

Cushing can store it for them, but the town's storage facility is full.

As Cushing is full, traders are betting that the oil price will crash further, which has sent the oil futures price to negative $37.63 (US Dollars), meaning sellers of oil futures are now having to pay buyers. 

Despite this bonkers time, however, the effects at the bowser may not be realised, but how?

In the market for a new car? The table below features car loans with some of the lowest fixed interest rates on the market.

Lender

FixedNew, Used99 yearsMore details
APPLY ONLINE
  • No ongoing fees
  • No early exit penalty
  • Flexible repayment options
APPLY ONLINE

Car Loan

  • No ongoing fees
  • No early exit penalty
  • Flexible repayment options
FixedNew2 yearsMore details
NO ONGOING FEES
  • No ongoing fees
  • No early exit penalty
  • Apply online
NO ONGOING FEES

New Car Loan

  • No ongoing fees
  • No early exit penalty
  • Apply online
FixedNew2 yearsMore details
QUICK APPLICATION PROCESS WITH NO FEES
  • Quick application process and no monthly fees
  • Low fixed interest rates with terms of up to seven years
  • New car loans cover cars up to 3 years old
QUICK APPLICATION PROCESS WITH NO FEES

New Vehicle Fast Loan Low Rate

  • Quick application process and no monthly fees
  • Low fixed interest rates with terms of up to seven years
  • New car loans cover cars up to 3 years old
FixedNew1 yearMore details
No ongoing fees
  • Interest rates ranked in the best 20%
  • No ongoing fees
  • Can apply online
No ongoing fees

Plenti Car Loan

  • Interest rates ranked in the best 20%
  • No ongoing fees
  • Can apply online

Base criteria: fixed and secured car loans for 'low emission' cars. Rates based on a loan of $30,000 for a five-year loan term. Products sorted by advertised rate. Repayments are calculated based on advertised rates. *The Comparison rate is based on a $30,000 loan over 5 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Rates correct as of July 3, 2022. View disclaimer.

Will petrol prices keep falling?

Experts are predicting a further sharp drop to be unlikely - Brent Crude oil is still trading at around $25 a barrel, and Tapis around $22.

OPEC nations recently agreed to slash oil production by 10% to keep in-line with lack of demand thanks to coronavirus travel restrictions.

That, and petrol prices are already quite low - CommSec is reporting Brisbane's fuel price is at a 15-year low, and the national average is at a four year low of 107.2 cents per litre (CPL) as of last week.

As motorists, we're also still beholden to fuel price cycles, which on the east coast are in their low point right now - the Australian Competition and Consumer Commission (ACCC) is advising motorists to fill up now (seen below).

As well as this, the Australian fuel market mainly uses Tapis Crude oil delivered from Singapore's trading market - this extra link in the chain effectively insulates us from any sharp movements experienced elsewhere.

The weak Aussie Dollar also has a hand in affecting fuel prices, as barrels of oil are traded in US Dollars.

So, while prices are low, and will likely remain low for the next few months, they are unlikely to drop much further at the bowser.

sydcycle

Source: ACCC

"But what about the futures?!" you scream.

Forget about the futures Marge, it's Chinatown. 

chinatown

Source: Giphy

The futures price that fell into negative territory was for the May contract, which is due up Tuesday (US time), according to CommSec senior economist Ryan Felsman.

"The June US NYMEX contract - traded more actively - settled at a much higher level of US$20.43 a barrel, but was still down by 18%," he said.

Oil futures contracts are settled month to month - June's contract will be settled in late May.

Investing and finance expert Peter Switzer labelled futures selling as glorified gambling.

"No one expected the world’s demand for oil would fall by over 30%, during what looks like a three-month period of lockdowns and restrictions on people’s movements," he said.

"If you don’t understand it, don’t invest in it ... I don’t think this oil price plummet is a precursor to Armageddon but it does show how precarious the world economic situation will be until we start killing off this ‘business unusual’ phase of our lives."


Latest Articles

author-avatar
Harrison is Savings.com.au's Assistant Editor. Prior to joining Savings in January 2020, he worked for some of Australia's largest comparison sites and media organisations. With a keen interest in the economy, housing policy, and personal finance, Harrison strives to deliver and edit news and guides that are engaging, thought-provoking, and simple to read.

Collections:

Be Savings smart.
Subscribe for free money newsletters.

By subscribing you agree
to the Savings Privacy Policy