Why is the price of oil in the US market negative?
In a historic event, the price of a barrel of oil in the North American market has become negative, and instead of receiving money, sellers give something to get rid of the barrels of oil. How did this strange thing happen?
First of all, you should know that the negative price of oil happened only for oil barrels that have reached their delivery deadline and the real price of oil remains the same.
Generally, oil contracts are concluded with a delivery date a few months later, which are called future contracts. These contracts are generally signed by oil brokers and dealers, and they use the opportunity they have until the oil delivery date to market and sell oil to consumers, which includes refineries, petrochemicals, and factories.
Since the consumption of oil has decreased drastically following the corona crisis, generally the brokers and brokers who have pre-purchased the oil have encountered problems in selling the purchased oil, and many of them sell the barrels of oil delivered tonight to get rid of the storage costs or to pay heavy compensation for the loss. They even sign a contract with the producer for free, even with a few dollars, so that customers are encouraged to buy oil!
An important issue is that at such times refineries and oil consumers enter the market with cash to hunt for cheap barrels and lower their production costs, but considering the storage of oil for several months in consumers’ depots due to a sharp decrease in consumption, even They also have neither the space nor the desire to buy oil from the auction tonight, and this has caused the price of oil to reach tens of negative dollars in the financial market! In fact, the accumulation of oil in the tanks has caused their capacity to be locked and there is less room to store oil that cannot be sold!
You might ask, why doesn’t production stop? The oil production cycle is not like a car production line that can be stopped at the push of a button. Stopping the cycle of oil production and restarting it is similar to blinding an active well and then discovering a new oil well and exploiting it, with the same staggering costs, so it is clear that stopping production is not profitable and oil production continues more or less as it was before. will have
Of course, as it was said, the real price of oil is not negative, and future oil delivery for the coming months will still be traded in the same $20 channel, and this fake channel filling news has no economic value.
What is happening today in the New York trading market is once again proof of the unparalleled power of the free economy and the invisibility of the market, which showed everyone that no other mechanism than supply and demand is decisive in the economy, and when there is no demand for a product, it is worthless. Even if that product is oil! Without consumption, there is no demand, and without demand, no value is produced, and without value production, there is no job and wealth!
Mr. Sasan