What fuel is called black gold

Negative oil price: how black gold became the buck

For the first time in history, a negative price was paid for oil. So providers had to go a little further to get rid of the so-called black gold at all. Buyers went on an unprecedented strike, nobody wanted to buy the oil - the stores are full, and demand largely slackened in the middle of the Corona crisis. When this will change again is an open question, as well as how strong a price recovery can be.

Question: What exactly happened that caused the price of US WTI oil to slide into the red?

Answer: The global demand for crude oil has slumped by almost a third due to the corona pandemic, and the warehouses are almost full. A high supply with little demand depresses the price. In addition, a deadline on the futures market has expired. That made the situation worse.

Question: What are futures contracts and how do futures trading work?

Answer: Many commodities are traded via so-called futures. Holders of these futures contracts undertake to purchase a certain amount - such as oil - at a certain price at a certain point in time. If you don't need the oil after all, you have to resell your future. If all of them do that, the price will drop. That happened on Monday. Because the contracts on oil for delivery in May could only be sold until today, Tuesday. As a result, everyone fled the market, with the price falling to almost minus 40 US dollars. This means that providers were willing to pay customers something. A complete reversal of the market.

Question: Why is oil not currently in demand?

Answer: Vehicle and air traffic has collapsed worldwide as a result of the corona pandemic, and factories have been closed. The demand for oil is therefore historically low. That depressed prices. In addition, the oil stores are now almost full. According to the US energy agency EIA, the amount stored grew within a week by 19.2 million barrels of oil at 159 liters each. It was the strongest increase ever recorded. In the city of Cushing in the US state of Oklahoma, where WTI crude oil is stored, there was only room for 21 million barrels on Monday, according to analyst Rystad Energy. US President Donald Trump announced that the US wants to increase its reserves by up to 75 million barrels.

Question: Can you feel the price drop at the gas station?

Answer: Yes. The price of petrol has fallen, oil has been cheap for a long time. A situation where you still get paid for refueling - like now on the oil market - is unlikely to happen. The costs of transportation, refining and taxes alone prevent that.

Question: Will the price of oil remain so extremely low?

Answer: Probably not. The current drop in prices was also due to the panic over the expiring futures contract. The price for WTI with a delivery date in June was a little over $ 20, and even higher for July and August. Whether there will be a similar sell-off in these contracts in the near future will depend on how long the world remains in the frozen state of the Corona crisis.

Question: With fracking, the extraction of oil and gas from shale, the USA has made itself independent of oil imports. Why is it hitting US oil so hard now?

Answer: The US is hit by the low oil price as a major producing nation. The fracking boom has also been suffering for a long time because the business model is based on the premise of endless growth in the global economy. Global growth, however, weakened even before the Corona crisis, and with it the demand for oil. This takes revenge especially for smaller providers, some of whom are also highly indebted. According to the US law firm Haynes and Boone, 208 US oil and gas producers have gone bankrupt since 2015 - they amassed a mountain of debt totaling 122 billion dollars. For some producers, when prices are low, it is best to close oil wells or file for bankruptcy. Last year alone, 42 companies were hit.

Question: Will there be a shakeout if numerous US providers go bankrupt?

Answer: Experience has shown that this is only temporary, as the production of fracking, in contrast to conventional oil, can be reduced and restarted very quickly. In the past, when prices fell significantly, production facilities had to be shut down or the operators had to file for bankruptcy. However, the production of US shale oil is ramped up again just as quickly as soon as prices rise again - often under a different operator. Since these high US oil capacities will quickly be back on the market when required, the oil price will probably remain at a rather low level for longer.

Question: How do the other large sponsoring nations behave?

Answer: The oil cartel Opec, with its leading member Saudi Arabia, has forged an alliance of convenience with Russia and other producers, the so-called Opec plus, in order to keep the oil price high through agreements to cut production. But the alliance broke up and resulted in a price war launched by Saudi Arabia. Only the most recent turbulence in the market forced both countries to come back to the negotiating table at which new subsidy cuts were decided - albeit without any significant support for the price.

Question: Were there ever negative energy prices before the Corona crisis?

Answer: Yes, for US natural gas. The fracking boom started a little earlier for gas than for crude oil, so that negative quotations occurred earlier due to massive overcapacities. That is why the US is behind exporting its natural gas to Europe in liquefied form. However, the process is expensive and energy-intensive, and special terminals are required for sea transport, which are currently still rare in Europe. (Bettina Pfluger, Alexander Hahn, April 22, 2020)