Subscribe to Outbreak, a daily roundup of stories on the coronavirus pandemic and its impact on global business, delivered free to your inbox.
This week the price of crude—a resource so valued that nations have waged wars over it—went under $0 for the first time in history.
On Monday, the WTI contract was sitting at a record low of minus $39/barrel. It has since rebounded to around $18/barrel as of noon Thursday, but that is still far below its February levels of around $50/barrel.
It all comes down to supply and demand. And without as many people commuting to work or flying, we just don’t need as much oil and gas.
Here are a few answers to the most common questions about this unprecedented plunge in oil prices.
How can oil prices go negative?
As the global economy demands less crude, the places to store it are filling up. Traders buy WTI—which stands for “West Texas Intermediate” and is a grade of crude oil used as a global benchmark—futures contracts all the time without actually having the capacity or means to take ownership of crude when it comes due. Even average joes can buy these contracts—you’d just want to sell before you’re obligated to take delivery of the crude. But with limited oil storing capacity and the delivery dates nearing on the May contracts, these traders started to sell at a loss on Monday since they couldn’t find buyers or physically store the oil.
“We’re going to see less paper traders and more physical traders. A lot of paper traders got burnt,” says Patrick De Haan, head of petroleum analysis at GasBuddy.
What’s the deal with companies running out of room to store oil?
There is only so much space to store crude. It takes years to build up capacity and requires meeting strenuous government regulations. And the world wasn’t prepared for a scenario like a pandemic where hard brakes are applied to the global economy.
What will happen when there is no more storage at all?
“Countries will stop producing if no one will take it. And once there is no where to store it, I don’t see any other option [than them halting production],” De Haan says.
In the long-term the balance between supply and demand will work itself out, however, WTI could temporarily go negative again before that point.
Will prices go down to zero at the pump?
No, gas stations aren’t going to pay you to take their gasoline. However, prices will continue to fall. In fact, Gasbuddy told Coins2Day on Tuesday there were six gas stations in Michigan where unleaded gas was going for $0.88 cents per gallon.
“We’re expecting to see prices to continue to decline,” says Devin Gladden, a spokesperson for AAA. Even if crude goes negative again, there are other cost including transportation and gas station margins that would keep prices above $0 at the pump. But the current national gasoline price of $1.79 could soon fall under $1.50.
Our mission to help you navigate the new normal is fueled by subscribers. To enjoy unlimited access to our journalism, subscribe today.
More must-read finance coverage from Coins2Day:
—Real unemployment rate soars past 20%—and the U.S. Has now lost 26.5 million jobs
—Why charging members of Congress with insider trading is so fraught
—Out of work, but not unemployed: How much Europe is paying its idled workers
—This time, the banks were ready: How the Big Four prepared to survive the coronavirus
—Furlough vs. Layoff? What to know about your rights and benefits
—Listen to Leadership Next, a Coins2Day podcast examining the evolving role of CEO
—VIDEO: 401(k) withdrawal penalties waived for anyone hurt by COVID-19
Subscribe to Coins2Day’s Bull Sheet for no-nonsense finance news and analysis daily.