Crude Oil Price in the US: Moving Towards Uncertainty |
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ABSTRACT |
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The case is about the negative price that crude oil in the US had reached in April 2010 due to the Coronavirus disease (COVID-19) pandemic and subsequent changes in the global macro environment. The pandemic led to a record fall in oil demand as the world’s largest oil importing countries went into lockdown to control the spread of the virus. As a result, the demand for products refined from crude oil started collapsing. The global oil industry was struggling with the sudden fall in oil demand due to the pandemic as well as the in-fighting among oil producers over reducing output. Earlier, in April 2020, OPEC member countries and their allies had agreed to a deal to slash global output to bring greater price stability to the oil market.
The US is one of the biggest producers of oil in the world. Oil prices in the country turned negative for the first time in history on April 20, 2020, amid the deepest fall in global oil demand. An oversupply of oil in the market caused the West Texas Intermediate (WTI) to plummet to a negative US$37.63 a barrel. There was so much unused oil available in the country that American energy companies lacked room to store it.
The abnormal fall in prices shocked the oil industry and had an impact on the global economy. As the COVID-19 pandemic brought the economy to a standstill, the firms with the ability to store oil – like refineries and airlines – stopped buying more because they did not have the storage capacity. An unprecedented fall in the demand for crude oil and the subsequent oil glut led to the filling up of storage infrastructure, which soon ran out of space. The pandemic left the world with more oil than it needed and nowhere to keep it. The overflow of unwanted oil in the market caused futures prices for a barrel of WTI crude to plunge to below zero. The negative price compelled sellers to pay buyers to take deliveries as they wanted to avoid storage costs, as oil demand fell globally. Companies started paying traders to take oil off their hands.
The recovery of oil demand was expected to take quite some time and would depend on how the COVID-19 crisis unfolded. The case illustrates how oversupply can have an adverse impact on the price of commodities.
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Issues |
| The case is structured to achieve the following teaching objectives: |
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- Identify the factors responsible for negative pricing in the crude oil sector.
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- Understand the impact of negative oil pricing on consumers.
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- Explain the reasons for fluctuation in oil prices.
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- Understand how negative pricing violates the law of demand and supply.
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- Suggest measures to maintain a proper balance between demand and supply of crude.
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Keywords |
| Oil market; crude oil overproduction; Fall in oil price; Oil storage problem,Pricing; Negative pricing; Price elasticity; Equilibrium price; Price determination,Law of demand and supply; Demand curve; Sloping demand curve; Fall in demand; Supply curve; Supply glut; Coronavirus uncertainties |
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