Oil Price Crashes To 34-Year Low

Oil Price Crashes To 34-Year Low

almost 4 years ago2 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 📆

What does this mean?

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.

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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.

Why should I care?

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.

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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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