almost 4 years ago • 2 mins
The price of a barrel of oil crashed to its lowest price since 1986 on Monday – and the reason might well be found in the “futures” market 📆
The 34-year low is partly down to the same falling oil demand that’s caused issues for weeks, but this time, it’s also down to futures contracts. Quick refresher: a futures contract is an agreement to buy or sell a certain amount of oil at a particular price on a future date, ahead of real-world delivery. And for oil which is due to be delivered in May, that “future date” was Tuesday.
But that meant any producer that didn’t offload their physical oil this month would have to pay to store it until the next delivery date in June 🛢 That’s problematic: oil demand is so low, and storage facilities so full, that storage prices are sky-high. So rather than face the additional costs, some producers immediately sold their oil at an even lower price – and in turn brought oil futures’ prices down to historic lows.
Some investors use futures to bet on the direction of oil: if they think its price will rise, they’ll buy a futures contract – and if they’re right, they’ll be able to sell that future on for a profit 💰 Those investors might’ve “rolled” their futures on Monday: in other words, they’ll have sold their May contracts and bought ones for June or later, pushing down near-term oil prices even more thanks to our old friends supply and demand.
Cheap oil is hard to ignore. For one thing, it could cause deflation if the prices of oil-based products tumble – and there are a lot of oil-based products. And for another, it’ll hurt the planet: after all, why would consumers buy new Teslas and businesses invest in renewable energy when the slippery pollutant is suddenly so much cheaper?
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