The price of oil in the US has turned negative for the first time in history as demand for oil has dried up with lockdown measures in place across the world. The collapse of crude oil prices threatens the global economy as it is already struggling to cope with the fallout from the coronavirus outbreak.
How can oil prices go negative?
The oil price has turned negative as lockdown measures across the world have kept people inside, meaning there’s a very low demand for the black gold.
As a result of the low demand, oil firms have resorted to renting tankers to store the surplus supply.
This move has forced the price of US oil into negative territory.
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Oil prices negative: On Monday the price of oil in the US turned negative for the first time (Image: GETTY)
Oil prices negative: A barrel of WTI fell as low as minus $37.63 on Monday (Image: GETTY)
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On Monday, the price of a barrel of West Texas Intermediate (WTI), the benchmark for US oil, fell as low as minus $37.63 (£30.61) a barrel.
Stewart Glickman, an energy equity analyst at CFRA Research said: “This is off-the-charts wacky.
“The demand shock was so massive that it’s overwhelmed anything that people could have expected.”
Brent Crude, the benchmark used by Europe and the rest of the world, was also weaker, down 8.9 percent at less than $26 (£21) a barrel.
Oil prices negative: Coronavirus lockdowns around the world forced the oil price down (Image: GETTY)
The US dollar rose against a basket of currencies on Tuesday as investors sought the safety of the world’s most liquid currency as a slump in oil prices sapped appetite for risky assets.
Oil is traded on its future price and Monday’s dramatic fall was driven in part by a technicality of the global oil market.
For WTI, May futures contracts are due to expire on Tuesday (April 21) and traders were keen to offload those holdings to avoid having to take delivery of the oil and incur storage costs.
Edward Moya, market analyst at OAND said: “Yesterday, the historic oil crash had a limited impact on U.S. stocks, but that won’t be the case going forward as the rolling of contracts won’t wait so close to expiry.”
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“Oil prices will remain heavy in the short-term and since many energy stocks have recently rebounded, they are ripe to see a lot of pain this week.”
Factory closures and travel curbs have also triggered a collapse in oil prices.
Minh Trang, senior FX trader at Silicon Valley Bank in Santa Clara, California said: “It’s definitely a risk-off day so the dollar is benefiting from that now.
Oil-linked currencies like the Norwegian crown and the Canadian dollar were Tuesday’s worst-performing currencies, along with the Swedish crown.
The dollar rose to a near one-month high against the Norwegian crown before easing to trade up one percent.
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Against the Canadian dollar, the US dollar was up 0.48 percent, while the dollar was 0.9 percent higher against the Swedish crown.
Mr Trang said: ”Even when you turn the economy back on it will take a while for demand to soak up the oil supply.”
Referring to the oil-linked currencies, he added: “Until this gets resolved you shouldn’t be surprised to see additional weakness.”
For the oil prices to rise, experts say it will take a recovery in demand to really turn the market round and that will depend on how the health crisis unfolds.