BOTTOM OF THE BARREL

COVID-19 causes oil prices to go into historic negatives—what does this mean for Canada?

By Jessica Berget, Editor-in-Chief

 

 

WHAT HAPPENED?

Once a rich and resourceful energy commodity, crude oil had become worthless for a
moment. Less than worthless.

On April 20, as a result of the economic slowdown due to the coronavirus epidemic, a
price war between two important oil tycoons Russia and Saudi Arabia, and the prospect of a
economic recession—oil prices are in the negative. West Texas Intermediate (WTI) crude oil
costs have gone down to below zero in a historical first reaching up to nearly negative $40
for a 42-gallon barrel (-$37.63 to be exact).

In short, this is because the supply of oil is overwhelming the demand. This happened
largely because of how oil is commonly purchased by “futures contracts”— meaning it is a
delayed purchase. Oil contracts are sold monthly. Because of the current epidemic, no one
is travelling or using transportation, therefore no one wants to store the oil since they cannot
sell it. Many contract holders sold their May contracts to avoid having to find a place to store
oil. Some companies and contract holders are paying people to take it off of their hands like
a game of “hot potato,” hence the negative price drop.

While May's contract is in the negatives, some are optimistic that the price of oil will
rise again in the coming months. For now, however, oil companies are having to halt oil
production and possibly even destroy the product to get by. Earlier this month in fact, CNBC
reported that the Organization of the Petroleum Exporting Countries (OPEC) and its allies
along with pressure from the US government agreed to cut down on oil production by 10
million barrels a day—which equates to about 10 percent of global production. While that
may have curbed the price from going even lower, there is still too much oil right now.
Onshore oil storage worldwide is now roughly at 85 percent, as reported by the World
Economic Forum (WEF). North American tanks are also nearly full to their max, as reported
by CBC.

In the past week oil prices have improved considerably, with WTI oil prices now at about
$17 a barrel, and June's contract changing to nearly $12 a barrel, but just last year the price
was $60 a barrel. We still have a way to go if we want to see oil prices come back.

c¢

Oil is used not just for jet fuel, but also as an
energy source, to heat our homes, and make
a wide variety of products in cosmetics,
sporting goods, electronics, plastics,
textiles, asphalt—and even solar panels!