On Monday night (20 April), the coronavirus pandemic caused oil prices to crash into negative value for the first time in history – here’s what it means.
Some of you may have heard on the news that for the first time in history, oil prices dropped to -US$35.20 on the night of Monday (20 April). Yes you read it right, oil prices hit negative value, which means you can’t sell it for money and worse, you need to pay someone to take the oil off your hands! 😱
1. What Do Negative Oil Prices Mean? Is My Petrol Now Free? 🚗
No, absolutely not! 🙅♀️
Firstly, we need to understand what it means by “oil prices dropped to negative”. Oil is traded on a “futures” basis and to put it simply: think of it as a pre-payment or pre-order for your favourite electronics or even a HDB flat.
Specifically, the spotlight in the news was referring to the pre-order price of crude oil with a delivery date in May in the USA, or technically known as WTI Crude Futures for May 2020.
This means that the pre-order price for oil in May is now almost free – nobody wants to buy and receive any more oil in May. Also the oil we’re talking about is crude oil (eg. raw oil) and not petrol or fuel (eg. refined oil products).
2. Huh? Why Does Nobody Want Oil in May? 🛢
Take hoarding toilet paper as an example.
First, oversupply. ⛏
Due to the coronavirus pandemic, many industries are closing down and oil keeps pumping. Imagine this: We’ve already hoarded 100 rolls of toilet paper in April, and we don’t really need to buy any more toilet paper in May.
Second, storage problem. 🚚
Now imagine an extreme scenario: you’ve accidentally ordered 10,000 rolls of toilet paper on Redmart and they managed to deliver to your home. But wait, you don’t have space to store them! And when the deliveryman comes knocking with 10,000 rolls of toilet paper, you’d rather pay extra money to ask him to get rid of these toilet papers. Similarly, storage space for oil in the USA is running out…
Third, expiry. ⛔️
The “pre-order contract” will expire on Wednesday morning (21 April Tuesday day end in the USA), which means that if you keep holding on to the contract beyond Wednesday morning, you won’t be able to easily trade it away, so everyone is rushing to sell them off.
To be precise, the oil price that’s in the spotlight is the 🇺🇸 US crude oil price, called West Texas Intermediate because the actual physical delivery of oil barrels happens in the US.
Meanwhile, another major index for crude oil price is Brent Crude, where the delivery happens in the 🇬🇧 UK. And currently Brent Crude is still well above zero (at US$24.73 at the time of writing for May). Also don’t forget that there are still many other pre-order contracts for other months beyond May – so no, oil is not free!
3. Does This Impact Airlines? Will They Benefit From Lower Fuel Costs? ✈️
Nope, in fact it’s the opposite! ☹️
Just like how oil is being traded, airlines also pre-order oil at a “locked-in price” (we call it “hedging”) usually one year ahead, if not longer.
For example, Singapore Airlines (SIA) has already locked in 51%+ for jet fuel costs until March 2021, which means they’ll be overpaying for the fuel, given that oil-related product prices have been dropping. While SIA didn’t buy the US oil futures which was the spotlight of the news, they bought some Brent Crue orders (the UK oil) which also saw a drop in prices, on top of the jet fuel.
In fact, even before the US oil prices dropped below zero on Monday night, there were already some speculations since March that SIA will lose S$1.2 billion just because of the oil pre-order – and also because all oil-related products’ prices have been dropping too. In fact, SIA won’t be the only one suffering from the same problem, as this will become one of the biggest operating challenges for almost all airlines this year.
4. Hmm, What Does This Mean For Me Then? 🤔
Well, for ordinary folks like you and me, the drop in oil prices could potentially mean that prices for oil-related products will be affected. It may become cheaper, but honestly nothing’s been predictable ever since 2020 began – so we’ll still have to wait and see.
Also, cheaper costs for corporations don’t always necessarily mean cheaper prices for consumers, especially so during an uncertain time like this (thanks a lot, Miss Rona).
If you’re still hoping for petrol stations to pay you to fill up your car, here’s why it may not happen. Again, most prices for oil-related products (including wholesale petrol) have been locked in with contracts. Coupled with costs incurred from refining, profits, taxes, transportation, and even marketing, it’s hard for petrol to even be free of charge to begin with. Sure, you could’ve gotten a barrel of crude oil for free on Monday night, but unfortunately you still gotta pay for petrol. 🤷♀️
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