Late yesterday 20 April 2020 we saw something we never though possible. This morning as you opened social media you were overwhelmed with the posts regarding this, some of them more factually correct than others.
In order to understand this, we must see it in perspective. In my opinion this will have little effect on South Africans at the fuel pump. The oil contract that traded negative was the WTI (Western Texas Intermediate) contract in the USA – it was not the Brent Crude oil contract, which is the one we normally follow.
Oil prices gets priced for every month of the year, you get an oil price contract for March, April, May etc. When you see the oil price on the news every evening, they reflect the oil price for the nearest month. On Monday night the WTI oil contract for May 2020 expired. There was a lot of people caught in this contract which they bought earlier and was forced to sell because if you go past the 20 th of the Month and you own oil for the next month you have to take delivery of the product. Because of low global demand for the product due to countries being in lockdown there is an oversupply of oil. All these people than owned May 2020 WTI oil wanted to dispose of it because they do not have a place to store it if they take delivery. The situation got out of hand the last minutes before the contract closed and it forced people that own this product to be willing to pay someone that will take if of their hands, that is why the product traded negative.
Put into perspective the following months traded on normal levels, the Brent crude price dropped to $25.57 per barrel. It is only the WTI oil that traded negative and only also because there was minutes left before closure and any market participants left in the market would have been forced to take delivery of a product they have no place to store, thus they were forced to compensate someone else to take it off their hands. It something we will surely not see again soon, and it does not mean we can take oil of their hands and get paid for it. The Brent Crude oil price that concern us is still priced at $25.
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