Oil drops a shocking 200% in 1 day — and prices goes negative for the 1st time ever
When opposite day is the new reality... There is so ridiculously little demand for oil right now that we could theoretically be getting paid to fill up our own tanks. The world's economic engine was switched off almost overnight — planes aren't flying, people aren't driving, factories aren't operating. That means oil demand has taken a massive nosedive. And things just got (literally) even more negative for oil.
- In 2008, oil hit a record high of $140 a barrel — it has hovered not too far from an average of $70 ever since. That is, until the corona-conomy came for its head.
- Yesterday, the price of a barrel plunged from about $17 to less than $1. Oil officially gained 99 Cents Store status. Then... things got worse.
- Oil plunged below zero and went negative for the first time ever. The price of the futures contract for West Texas Crude fell to negative $38 a barrel.
A crude awakening.... We've got so much unused and unwanted oil around that US energy companies have nowhere to store it. Even with the recent OPEC production cuts, it's still way too much (it'll always be too much if no one wants it). That's why sellers are literally paying buyers to take their oil inventories off their hands.
Eye on the futures (contracts)... If the price of oil goes up, airlines will lose since they have to pay more for oil — if the price goes down, oil companies lose, since their product's worth less. Both airlines and oil companies want to protect themselves from price fluctuations, so they can "hedge" their costs/revenues using futures contracts, which hand off the risk (and potential reward) to investors.
- Investors agree to buy or sell oil in the future at a set price. Buyers hope the price will go up because they would get to buy oil for less than it's worth (vice versa with sellers).
- Right now, oil contract buyers are scrambling to sell before they are forced to pay way more than oil is actually worth.