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Oil's amazing moment as crude prices fall below zero

Graham Watson

22nd April 2020

This has been an amazing few days and weeks for the crude oil market with prices for West Texas Intermediate falling below zero.

The Guardian reports here on the collapse of West Texas Intermediate prices - such that its price is now negative. This means that producers are paying to dispose of the excess. And President Trump has suggested that the US will be filling its strategic oil reserves - if they aren't already full, of course.

The fascinating thing about this is conceptualising the demand and supply diagram.

A brief summary here of why the price of US oil has fallen below zero: bear in mind, it's a forward market, and applies to May delivery. The price of oil for June delivery is still positive, but it is likely to fall further.

This article looks at the distributional effects of the fall in oil prices, with some countries more dependent than others on oil for growth, employment and to fund government spending. In short, net oil exporters are likely to suffer to varying degrees, but oil importers are likely to benefit.

There's a suggestion that the worst hit economies will be Ecuador, Nigeria and Iraq, but even producers with relatively low costs, such as Saudi Arabia appear likely to struggle if oil prices remain this low for any length of time.

And here are two videos that helpfully explain what has been going on in the market

How the US oil price fell below zero | FT
What Just Happened To Oil Prices?

Graham Watson

Graham Watson has taught Economics for over twenty years. He contributes to Tutor2U, reads voraciously and is interested in all aspects of Teaching and Learning.

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