In a word – oversupply. Right now there is so much excess crude sloshing around the US and global markets that producers and traders are literally running out of places to store it – both on land in tanks, and even at sea on oil tankers. When prices turn negative, that signals that traders are willing to pay to have oil taken off their hands. That’s why we are focusing on the crashing crude oil markets in the USA.
Any country that relies heavily on oil for the lion’s share of its income is getting clobbered right now. So are US shale oil producers, because their cost of production is relatively high. Many US oil producers need crude to fetch between $46 to $54 a barrel to break even, let alone to turn a profit. It doesn’t help that a lot of companies in the US shale patch borrowed big time to drill new wells, which are simply not profitable when prices crash. Which is why President Donald Trump personally got involved in oil markets.
A global oil glut sent prices so low Monday that sellers holding U.S. crude contracts paid buyers as much as $30 per barrel to take it off their hands. The crashing went international, with futures prices for the global benchmark, Brent crude, dropping to a fraction of the $50 or so needed for a producer to make money. It was an ominous sign, suggesting that oil markets and the world economy may not stabilize for months.
A fresh plunge in oil prices dragged down investments from stocks to currencies, stinging investors anew and adding even more urgency to the crisis sweeping the energy industry.
Despite the weakness in headline prices, retail investors are continuing to plow money back into oil futures. The U.S. Oil Fund ETF saw a record $552 million come in on Friday, taking total inflows last week to $1.6 billion.
The price collapse is reverberating across the oil industry. Crude explorers shut down 13% of the American drilling fleet last week. While production cuts in the country are gaining pace, it isn’t happening quickly enough to save crashing markets.
It means lower petrol prices, although what you pay at the pump may not fully reflect the oil price drop. Bear in mind that excise duty and VAT make up nearly 60% of the price of a litre, and that isn’t coming down any time soon.
Obviously if people are spending less at the forecourt, they have more money to allocate elsewhere, and that is a potential boost to the economy.
However, if petrol-driven cars cost less to run, that means there’s less incentive to invest in alternatives, such as electric vehicles, so in the long run, low petrol prices could be bad for the environment.