so, why is oil's price negative?
(note: I am a software developer who has an interest in finance. This is my understanding. I am not a professional.)
first, what does that even mean? so, the "price of oil" is the price of "WTI Crude", which is a specific kind of oil. There are multiple kinds of oil with multiple prices.
Why is it negative? to understand this, we also have to understand why WTI is the price of oil: that is, it's the kind of oil that underpins the New York Mercantile Exchange's oil futures contracts. The NYMEX is kind of like the stock market, but for commodities, aka stuff.
So imagine I'm an oil producer. I need to plan my business. But the price of oil changes all the time. How can I know that I'm still gonna make money next month? What if the price drops to $5/barrel? Let's say it costs me $20/barrel to get it out of the ground. If I can sell that oil for $40/barrel, I will make a $20/barrel profit. But it takes time to get that oil out of the ground. I can pull 1000 barrels per month out. If the price of oil falls to $5/month next month, I am screwed.
Let's change gears. Imagine I'm a plastic factory. I need oil to make my plastic. I know I need 1000 barrels per month to do my business. But the price of oil changes all the time. How can I know that I'm still gonna make money next month? What if the price raises to $60/barrel?
Both of these parties can get what they want, through a "futures contract." It's a contract that gives you stuff in the future. So oil producer me says "hey, I want to sell someone 1000 barrels of oil next month for $40/barrel." This way, my price is locked in. If the price goes up or down, I'm still making my $20/barrel. Yes, if it goes up, I'd have made more money, but I'm willing to ignore that in order to save my butt if it went down to $5/barrel. And likewise, as the plastic factory, I'm happy buying at $40/barrel. If the price went down, I'd make more profit, but I'm willing to ignore that in order to save my butt if it went up to $60/barrel.
So what's the problem here?
Welllllllllllllllll this only works if enough people want to buy and sell these contracts. Turns out, about 2/3rds of people want to make money off of the changing price of oil, rather than having the oil themselves. So how does this work?
Well, I'm a commodities trader. I deal in futures. I think next week the price of oil is gonna go up. So I buy a futures contract from the oil producer. I will be shipped 1,000 barrels next month, for $40/barrel. That's $40,000. A week goes by. The price of oil goes up to $45/barrel. I sell it to the plastic factory. That's $45,000. I have made $5000.
... but what happens if the plastic factory doesn't buy my oil? Maybe they decide that they really need it to be $30/barrel for it to make sense. If I don't find a buyer for my oil before next month, well, it's gonna get shipped to me. And I'm a commodities trader, I don't have all of the stuff and people needed to store a bunch of oil. That's the whole deal; I don't actually want the oil, just to make the money. So as time goes on, it's closer and closer to the time when the contract is up. I start to sweat. Fine, I'll sell it for $30/barrel. I'll lose money, but less than if I have to actually deal with the physical oil itself.
... what if $30 isn't good enough? The economy has changed in the past few weeks, and less people need oil. So there's less demand. So people don't want to buy it; after all, it costs money to store and transport, and if I can't sell enough plastic, even if it's $5/barrel, it doesn't make sense for me to buy.
Eventually, things get really desperate. I really don't want to deal with this oil. I will literally give it away, or even pay you to take it, because that's still less money that I'd lose than if I'm somehow responsible for all this oil.
... and that's how "the price of oil" can go negative. Capitalism!
ADDENDUM: This doesn't mean that it'll be like this forever. This is happening because well, tomorrow is the day that the contracts for May are up. You can look at the prices for June, July, and August, and they're more reasonable.
So good and understandable 👍
Plus, I want to say this is my first time to read something else than computer stuff on Github. 😁