Oil Prices Plunge To Below Zero

For the first time in history on 20 April 2020, US crude oil prices benchmark, the WTI contracts plunged 300 per cent from US$17.85 a barrel to minus US$37.63 a barrel. This may sound ridiculous. However, it is a reflection of the real situation now. With guidance from your economics tutor Singapore in economics tuition Singapore, discuss the economic implications of a negative oil price.

Demand And Supply Factors

Both demand and supply factors have not worked in favour of the oil prices in recent months. The worldwide lockdowns and movement control measures have severely affected demand for oil. Except for people in essential services sectors such as medical care, supermarket, food and public transport, most people around the world are not allowed to move around freely. Hence it removes the need for billions of people around the world to pump petrol for their vehicles. Making things worse, unemployment rate has been surging. In the United States of America alone, unemployment claims surpassed 26 million as of 24 April 2020. The number of unemployed people in the world will be much more. These people who have lost their jobs will be more prudent in spending and will likely only use their limited financial resources on necessities such as food and medical care. In discussion with your economics tutor Singapore in your economics tuition Singapore class, give another example of how Covid-19 global pandemic has led to decrease in oil demand. You may also consult your economics tutor Singapore in economics tuition Singapore the definition and economic implications of unemployment.

Demand factor itself will not push the oil prices into the negative territory. Another culprit is the supply factor. I have published another article earlier about the two major oil producers, namely Russia and the Opec increasing their oil productions significantly in a brutal price war. To read this article, please visit Economics Cafe Learning Centre’s website at www.economicscafe.com.sg. Founded by its principal economics tutor Singapore, Mr Edmund Quek, Economics Cafe Learning Centre is the best economics tuition centre in Singapore. The economics tuition centre is conveniently located within five minutes’ walk from the Bishan MRT Station. The severe oversupply has made it difficult to find space for oil storage. According to the US Energy Information Administration, storage in some of the major storage tanks was 72 per cent full as of 10 April 2020. This will drive up the oil storage costs, to an extent that it will outweigh the profit from oil trading.

Near Capacity Storage Levels

Oil contracts are traded for a month. Traders holding May contracts have to trade the contracts at a price below $0 a barrel in order to take them off their hands since they do not want to incur storage costs. Future contracts are delivered to Cushing, which has a total capacity of about 76 million barrels. Recently, stock at Cushing has been piling up at a breakneck speed of about 745,000 barrels a day. At this speed, the tanks will be full before end of May. In the past few months. about 30 million barrels have been put into storage every day, about 30 per cent of global demand. To learn more about oil demand and supply, you may sign up for economics tuition Singapore with a reputable economics tutor Singapore. Mr Edmund Quek is the best economics tutor Singapore known for incorporating real world events into his economics tuition Singapore. You may contact the economics tutor for a free consultation about his online economics tuition during circuit breaker period. There is no sign that the global demand will return to pre Covid-19 levels any time soon. Even if it returns to the pre Covid-19 levels, it would take a very long time for the accumulated stock to be depleted.

The oil price crisis may add pressure to the already fragile world economy, complicating the tough task facing central banks to keep the economies afloat during this unprecedented trying period.

Linda Geng

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