What the Negative Price of Oil Is Telling Us

Over the last six weeks, demand for products refined from oil has collapsed. With far fewer airplanes flying, airlines need less jet fuel. People aren’t driving, so they need less gasoline.

But oil producers have been slower to cut back production, meaning there is a glut. All the usual places to store it are full, and hence the negative futures prices to enable the market to clear. There are only so many storage tanks.

Futures prices suggest that the oil market will work through this, as drillers suspend production. The June futures contract was trading for $21.41 late Monday, and the September contract for over $30. Commodities traders call it a state of “super contango,” with sharply higher prices in the near future than today.

The economic result of the pandemic is, more than anything, a sudden stop of demand. There may be a few products in which shortages are an issue, including medical equipment, personal protective gear and disinfectant wipes. But the overall picture is that a huge share of potential economic output is simply on hold.

That includes obvious candidates like restaurants, airlines and sports arenas, which are sitting empty. It includes the 22 million workers who have filed for unemployment insurance benefits, with many more likely to come. It includes less obvious candidates like the auto industry, which has temporarily shuttered factories. And, we now see, it includes the energy industry, with more capacity to pump oil out of the ground than there is demand for at present, and inadequate storage capacity.

All of that points to a deflationary collapse — a glut of supply of goods and services, and consequently falling prices — that surpasses anything seen in most people’s lifetimes.

Article source: https://www.nytimes.com/2020/04/21/upshot/negative-oil-price.html