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Why The Price Of Oil Fell To Negative Levels, Did The Seller Have To Pay The Buyer?


On April 20th, WTI crude oil price (light sweet West Texas, USA) delivered in May dropped to -37.63 USD/barrel. WTI oil price initially dropped to -40.32 USD/barrel and then increased to -37.63 USD/barrel when closing the session.

However, this morning 21st April in New York market, US WTI oil prices delivered in May rose again, up to 1.1 USD/barrel. Meanwhile, Brent crude oil delivered in June is currently trading at 25.61 USD/barrel, up 0.15%.

Why oil prices are negative? 
A drop in oil prices is what happens when the seller has to pay the buyer for oil because the price has dropped too deeply. 

Why do sellers have to pay buyers?
For some manufacturers, if they must stop oil production, it may cause damage to machinery and equipment, causing economic damage in the future. Therefore, selling oil and paying buyers, instead of receiving money, this cost in the long run will be much cheaper than having to stop production or find new warehouses to store excess oil redundant on the ground. 

Many traders currently do not intend to receive oil because they have chosen to buy under futures contracts, in order to avoid the effects of price fluctuations and get stuck between falling too deep and being forced to choose to find storage or sell hole.

So many people had to choose to make decisions to pay buyers, in the context of increasingly rare storage because of increased oil production.

Both the pandemic and the oil price war between Russia and Saudi Arabia have contributed to global energy markets. 
Initially, the COVID-19 epidemic caused worldwide transportation activities to stall, dragging down demand for oil.

As the impact of the pandemic began to overcome medical problems and hit economies, Saudi Arabia and Russia started the oil price war.

The Organization of Petroleum Exporting Countries (OPEC) and the consortium had reached an agreement to reduce historical energy, but the amount of oil poured into the market was "too" tolerated by the market, leading to a moderate situation of lack of buyers and no inventory.

Experts say negative oil prices have proven OPEC +'s 10% oil cut deal too late.  The first oil price may drop to a negative level in some small corners of the US market, such as the state of Wyoming, where there is little storage. 

However, the larger markets began to set negative prices for a small stream of crude oil. By April 20th, prices had dropped to a negative level in the global market.

Are consumers affected?

In the US, the average price of gasoline has dropped by more than 1 USD/gallon ($ 0.26 / liter) in 2019 to 1.81 USD/gallon ($ 0.48/liter). Gas prices have continued to fall every day since the end of February 2020, according to Bloomberg.
Observers predict that it will take many more weeks for the latest event to really affect gasoline prices, if the taxes on this item are taken into account.

Oil price volatility pushed share prices in Asian markets such as Japan, Australia and South Korea lower to the start of the session on April 21.

As of 9am 21-4 Tokyo time, the Topix index decreased by 0.9%, while S&P / ASX 200 (Australia) and Kospi (South Korea) decreased by 1.1% and 0.7%, respectively.
After falling 1.8% from a 6-week high, the S&P 500 futures rose 0.5%. Investors are struggling with the impact of falling oil prices and signs that COVID-19 deaths in parts of the world, including New York (USA), have dropped and Travel restrictions may be relaxed.

Meanwhile, the US Congress is close to launching a new spending package to mitigate the damage caused by the pandemic.


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