There’s so much oil on the global market, the price became “negative” for the first time in history.
On Monday night the price of West Texas Intermediate (WTI) oil, used as a benchmark in oil pricing, plunged by over 300 percent to almost minus $40 dollars a barrel.
This meant that a US oil company would have had to pay a buyer around $40 to “sell” a barrel.
One financial analyst described it as “off-the-charts wacky”, another tried to brush it off as a “quirk” of the free market.
It’s further evidence of the anarchy of the market and production for profit under capitalism.
One underlying cause is just how much Oil is going unused due to the coronavirus crisis. Oil prices began falling when the Chinese government was forced to impose a lockdown in Wuhan and other provinces in January.
In 2018 China became the world’s largest oil importer and purchased up to 9 million barrels a day to fuel its industrial expansion. Within a few weeks of lockdown, its oil consumption was down 20 percent.
At the same time Saudi Arabia launched a price war against Russia, seeing coronavirus as a good opportunity to grab a bigger slice of the market. And just as demand was collapsing, the Saudis increased production.
In response, Donald Trump pushed Saudi Arabia and Russia to agree to supply cuts. He claimed it was a “great deal for all” who signed. It’s turned out to be a total humiliation for all and won’t help Trump’s allies in the fossil fuel industry.
Even if Saudi Arabia, Russia and all the other states that control the price of oil worldwide - known as the organisation of the petroleum exporting countries (OPEC) slashed supply, it wouldn’t help US producers.
Cushing in Oklahoma—dubbed the “pipeline crossroads of the word”—is where US oil is stored.
An almighty jam has been building over the last month. By 10 April, its tanks were already at 72 percent capacity. Even traders who had already leased space couldn’t be guaranteed a spot.
This sent panic through the markets.
The bizarreness of “negative prices” is partly down to how oil is bought and sold at its future price.
A “futures contract” is supposed to protect profits. For instance, a US oil company could agree to deliver 1,000 barrels at $50 a barrel in four months time, guaranteeing it a good price. This would be a good deal for an airline that fears that the market price will go up by that point.
The price of a futures contract fluctuates on a commodities exchange where they are traded.
This is done mainly by speculators who make money betting on price movements and don’t want physical products. Vast sums are swindled in a socially useless activity as the planet burns and people are put last.
The expiry date of the WTI futures contract was Tuesday of this week. As futures contracts are traded, their price fluctuates. But whoever has possession of the contract at the expiry date, has to take possession of the oil in Cushing.
This meant traders were desperate to sell— to avoid having oil no one wanted housed in expensive storage.
Other oil benchmarks—such as Brent Crude from the North Sea—haven’t gone negative because of smaller storage problems. But the crisis for the sector caused by oversupply still affects them. This is likely to push huge energy companies to the wall and they will no doubt beg for more bailouts.
The problems in the oil industry are a symptom of a bigger slump coming. British capitalism, for instance, is predicted to go into a 35 percent contraction. Coronavirus might have been the trigger, but the global economy was already weak because of an underlying crisis of profitability and huge debts.
The threat of climate change already showed us the need to break with fossil fuel capitalism and have a sustainable energy sector. This crisis underlines the need to fight for a democratically, planned socialist society with production for human need not profit.