HomeEncouraging Signs for the Oil Market

Encouraging Signs for the Oil Market

14 May 2020 By Mircea Vasiu

If there is one chart to remember after the coronavirus pandemic is behind us, let it be the one below. For the first time in history, the price of crude oil moved into negative territory.

It did so on the futures market where the WTI April 2020 contract fell dramatically as supply and demand imbalances spooked investors. A futures contract is an agreement between two parties, the buyer and the seller, to deliver the product at a future date but at a price agreed at the start of the contract. The arithmetic of it is very simply – the buyer profits if the price rises, the seller profits if the price falls. By how much? The answer comes from the difference between the spot price at delivery and the previously agreed price at the start of the contract.

It is not that dramatic, though, because in the futures market, the clearinghouse marks the prices daily, so players holding the contracts have to refill their margin accounts. But still, the dramatic move at the end of April showed how much demand fell when compared with supply.

Demand Picking Up Already?

It was not only oil that was affected by the pandemic. Other commodities suffered too, as their prices dived in a scary moves for producers.

A recent study by the World Bank and OPEC shows that for the three months ending April 2020, Australian coal and natural gas in the US and Europe fell too. While not as dramatic as in the case of oil, declines of -12.3% on a three-month basis are enough to cause producers to rethink their strategy.

Producers received an encouraging message from the IEA (International Energy Agency) today – the forecast for demand for oil prices has been revised higher. The positive sign here is not the size but the potential change in trend.

As economies start reopening again, slowly but surely oil demand and that of other commodities will pick up also. As traders and investors look ahead, especially players in the derivatives market that use it to hedge their risks, rising demand is a positive sign for all parties involved.

In the aftermath of April’s historic negative price for oil, countries outside OPEC started to cut the output massively. All over the world, producers are shutting down in supply faster than expected – with the US to join the party as well.

For a commodity as important as oil is, negative prices were a staggering development. It shows the complexity of the current crisis and how things we deem impossible, can, in fact, happen.

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