Crude oil plunges to - $37.63 a barrel for the first
time in history
With the coronavirus pandemic break out, the financial
markets are seeing a lot of volatility and uncertainty. One such event was seen
in the oil market on Monday. The demand for crude oil crashed globally leading
to the price of the crude oil falling down to - $37.63 a barrel. This is the first time oil prices have turned
negative. The negative price suggests that the sellers are literally paying the
buyers to take deliveries in order to avoid paying for the storage cost.
The crude oil price at the beginning of the year
was over $60 a barrel. Read on to know what led
to the fall in crude oil prices and what should be your trading strategy in
such a scenario.
Reason for fall in the crude oil price
The major
reason contributing to this fall is the excess unused oil kept with American energy companies. The COVID-19 pandemic has brought
the world economy to a standstill. In spite of low demand, around 100 million
barrels of crude oil are produced in a single day. The excess production is
despite a deal with many nations to cut the production of oil including Russia,
Saudi Arabia, among others. Owing to this, the world is facing a problem to
store all the oil the industries are pumping out. As per the energy expects,
the estimated total storage space in the world is around 6.8 billion barrels of which around 60% is already filled.
Besides, oil is traded on its
future price and May futures contracts are due to expire on Tuesday. Because of
this, most of the traders offloaded their holdings to avoid taking deliveries and
incurring storage costs.
Crude Oil Price Chart
What does the future of oil look like
The oil infrastructure around the
globe is quite complicated and the situation is likely to take time to come
back to normal. It is not so easy to immediately fix the oil industry problem.
Moreover, countries like Russia and Saudi Arabia whose economy majorly relies
on oil are reluctant to curtail the production. Besides, shutting down the oil
wells can prove to be a costly affair as it would require expensive equipment
and manpower to restart operations when the demand returns.
What should be your trading strategy?
In these unprecedented times, commodity, specially the high beta
commodities like Crude oil is moving on life time and historic volatility.
As a trader you have to be very clear with your risk appetite and the choice of
trading instruments, specially if you are leaving your positions open
overnight. One cannot deny the possibility of this fire sale kind of situation happening
in future again. Therefore, traders with low to medium
risk appetite should clearly shy away from trading in these high volatile
commodities in these uncertain markets.