Negative oil futures: How low will petrol prices go?

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?

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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.

Source: ACCC

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

Forget about the futures Marge, it's 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."

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