Crude Oil Drops Below Zero– Oil future contacts collapsed to below zero for the first time in history in the WTI index by the corona crisis. The price of May contracts wiped all the records of oil since 1946. The exchange where WTI future trade said the contract would be allowed to price below zero.
Understanding the Crude Oil
Crude Oil is a naturally occurring unrefined petroleum product composed of hydrocarbons and other organic compounds. It is a type of fossil fuel and it is a non-renewable resource i.e. it is a limited resource and cannot be replaced after its consumption.
Crude Oil is defined to produce products like gasoline, diesel, net fuel, and other forms of petrochemical products. It is a global commodity that trades in the market around the world.
Crude is obtained through deep drilling in the land as well as oceans and it is usually found with other fossil fuel like natural gas. It is also called the Black Gold because of its demand and high fluctuation price in the world. Crude Oil has a ranging viscosity and the color may vary from black to yellow as per the hydrocarbon composition present in it. Distillation is the first step in refining where crude oil is heated and separated in different components.
History of Crude Oil
Crude Oil was first discovered in the Industrial Revolution and its industrial usage began in the 19th century. Countries had rushed towards this sector. United States of America, United Arab Emirates, Russia, United Kingdom are the leading countries of oil production and supply.
Investments in Oil
Investors usually purchase two types of contracts-
- Spot Contract
- Future Contract
Spot Contracts– The price of spot Contracts reflects the current market price of the oil. In this case, the demand for immediate supply is less and the investors don’t intend to take the delivery at all and they normally sell the contract after getting a higher amount as per the market price.
Future Contract– It is an agreement to buy or sell a certain number of barrels with a set amount of oil at a predetermined price because the price of oil keeps on fluctuating. When this contract is purchased an agreement is signed between buyer and seller, secured with a margin payment that covers the percent of the total value of the payment.
There are two major oil contracts in which oil marketers are interested. In North America, the benchmark for oil futures is West Texas Intermediate (WTI) crude which trades in New York Mercantile Exchange (NYMEX). In Europe, Africa, and the Middle East the benchmark is North Sea Brent crude which trades on Intercontinental Exchange (ICE).
Oklahoma is the pricing point for WTI oil prices and it is the highly preferred future contract in the world. If demand for fuel doesn’t pick up then global oil prices would chase US crude.
The analysts say that due to this pandemic there is no demand oil because there is no consumption by the consumers as the industries were closed due to this pandemic but the oil produced by the US has become in excess amount and they don’t even have the higher storage facilities to store all the excess oil.
Citi analysts told that if global storage worsens more quickly then Brent could chase WTI more down to the bottom. Jon Sudduth, a crude oil market analyst told that in theory if the oil price becomes zero so the producer must discontinue its production but in reality, it is more economical for them to gain a higher amount of profits from the market.
Historic Oil deal among three nations USA, UAE & RUSSIA
As oil traders look with the fear of the OPEC+ teleconference after the fall of crude below zero in the WTI index. So these three nations decided that they will cut their production of oil and limit their supply to retain the price as well as to recover up with this issue. This deal will create more strong relations among the three countries because the majority of the world’s resources are found in these countries.