Let's talk oil. Specifically, benchmark U.S. oil called West Intermediate crude oil (WTI). The prices of WTI fell into negative territory yesterday. We should clarify what "prices" means here. The roughly -$37 per barrel price is the price of May oil "futures"-- what energy companies had agreed to pay to procure one of these barrels today, in May. Problem is, the demand for oil has been plumetting and so the actual physical storage space for oil has been filling up. Picture this as full oil tank located in Cushing, Oklahoma. A compounding factor is that this particular location in OK is landlocked, so producers can't even load up the oil into ships. This kind of floating storage is often used for oil that is pumped out of, for example, the North Sea.
What kind of macro effects could we be looking at? Oil companies will start shutting down oil wells, reducing supply. If demand by airlines and other consumers of oil picks up quicker than oil wells can re-open, there may be a situation of a supply shock (or scarcity) instead of the current glut. But as most questions about the post-pandemic economy, the answers remains unclear.
Because of oversupply, storage tanks for WTI are becoming so full it is difficult to find space. The U.S. Energy Information Administration said last week that storage at Cushing, Oklahoma, the heart of the U.S. pipeline network, was about 72% full as of April 10. (Reuters)The investors who hold these oil delivery contracts for May do not want to pay for storing this oil, and so are williing to pay to get rid of it. Voila, negative prices! The June contract price is falling but still ~$20 per barrel.
What kind of macro effects could we be looking at? Oil companies will start shutting down oil wells, reducing supply. If demand by airlines and other consumers of oil picks up quicker than oil wells can re-open, there may be a situation of a supply shock (or scarcity) instead of the current glut. But as most questions about the post-pandemic economy, the answers remains unclear.
