For the first time, in a worying sign, oil futures fell into the negative territory What...

 

  
 

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For the first time, in a worying sign, oil futures fell into the negative territory What strange times we live in. Unprecedented Unsure. Where givens are turned upside down. Yes, coronavirus is one element. But a time when commodity traders will pay you to take oil their oil. A fuel without energy, a commodity without value, a baseline index worth less than ifevery barrel of oil stayed put in the ground. There are memes now of drivers who go to petrol stations to fill up their cars and are given atanker truck of fuel in return. So what has happened this past week? Why has oil, which five years ago would cost you $127 a barrel is now worth, in the case of West Texas Intermediate (WTI)– 530 a barrel.Commodity dealers will pay you to take the stuff off their hands. There are tankers laden with the stuff anchored off most major ports, there are storage facilitiesthat are bursting at the seams with it, and there are commodity deals who would fill every pot and bottle if they could and hide it away in mines until such a time as crude rises. So what has happened this past week? Why has oil, which five years ago would cost you $127 abarrel is now worth, in the case of West Texas Intermediate (WTI) – $30 a barrel. Commoditydealers will pay you to take the stuff off their hands. Storing oil in vast quantities Of course, nothing is as simple as it sounds. And no, unless you've got some form of storing oil in vast quantities, like tanks, trainloads of tankers cars, or a fleet of oil tanker vessels – does thisprice apply. In a nutshell- oil is cheap, there's lots of it, and no one is using it. If you want to sound intelligent during this lockdown or the next time you're on a Zoom call and the topic comes up, use can explain the collapse something like this Remember that basic law ofsupply and demand? The more something is in demand, the higher the price. Or the more people demand something. the higher the price. Now turn that price dynamic on its head. There's a supply that no one wants - the price falls. And when no one wants it, the price falls. And when you only have a limited room to turn off the supply, the price falls. And when you'rerunning out of room to store it, the price falls. That's what's happened That -$30 price is being offered by sellers right now for oil to be delivered in May. The May futures price – the price for delivery then – was set on April 21 and it was influenced by a one-third decrease in demand for fuel. Factories are mostly shut around the world, planes aren't flying, cars aren't being driven and -in the northem hemisphere, homes don't need to be heated. That means there's much less demand. And prices go down. In the US, which has become mostly self-sufficient in oil because of the growth in fracking overthe past decades, storage facilities are full. But fracking is a costly way of getting oil – both in terms of the environment and economics. As long as it's worth their while, frackers keep producing but store their excess product for atime when the prices are higher and when demand requires it. But storage tanks are full. Full storage tanks forces the price down in a big way. And when those tanks are full, the traders need to find other ways storing the excess. And the most cost effective way of doing that is to drive the price lower. Not just about storage But of course, this isn't just about storage. For the past two months, Saudi Arabia and Russia – behemoths in the oil producing world -have been engaged in a standoff. Let's go back to carly in 2020 – when the pandemic was just beginning Oil was already fallingin price because the global economy had been starting to slow. SEM Slowing economy means lower oil prices. And the Saudis wanted to cut production further to keep prices stable. The Russians adamantly disagreed – they wanted to produce more. OPEC, (currently, the Organization has a total of 13 Member Countries.) members and others were in disagreementon what to do. In December 2019, oil was at S67 a barrel. In January, it was S63, and in February it was at $56. And by early March, it was at $36. And that's when Saudi Arabia decided to open its taps, adding another 2.6 million barrels daily to the market. But why flood the market when prices are lower? Well, that's when production costs really comeinto play. Page 3 of 5 The Saudi's can bring a barrel of oil to the market with all costs paid at around $8.98 cach, Russian costs are S19.21, and shale producers have costs of at least $25 per barrel. Within days, oil started to tumble, down to the mid $20s – cheaper for buyers in Europe,Russia's primary market - to buy. The price war was on Along came the coronavirus. (COVID19) No one is driving, no one is working, no one is flying. No one is heating homes or using much energy – or it comes from power from renewable sources. No one is buying much oil. And theprice drops. Even things are stable on the geopolitical front – no threats to global oil supplies - becauseeveryone is too busy staying safe from Covid-19. So when carlier this week the price of oil fell into negative territory, it's because there was noroom to store stuff being ordered for delivery in May. WTI is based on delivery from one place – Cushing, Oklahoma, where oil is moved to fromacross America and stored for physical delivery. That's the price that has collapsed. No, those memes where you drive away with an oil tanker for filling your car are tautology. Govemments draw a lot of money into their coffers from excise duties on fuel – so most driverswon't be paying much less at the pumps. But with oil so low now, it's a clear sign of the economic woes still facing us at the end of thispandemic. The students are required to answer the following questions. (Draw the diagram where it is required) QUESTION-1 ( CLO3) 1.1. Considering the present case "Examine the law of demand and law of supply". ( 2 marks) ( 50-60 words) 1.2. Read the case and examine the reasons for the low price/or negative prices of the oil. ( 2marks) ( 50-0 words) 1.3. Examine the impact of COVID19 on oil market. (1 mark) (20-30 words) QUESTION-2 (CLO4) ( 5 marks) 2.1. Analyze the impact of COVID19-on various sector (demand and supply) affecting the economy, locally and internationally, on local and global economy. QUESTION-3 (CLO5) ( 5 marks) 3.1 Evaluate "Post COVID-19" impact on the economy. Give your opinion. For the first time, in a worying sign, oil futures fell into the negative territory What strange times we live in. Unprecedented Unsure. Where givens are turned upside down. Yes, coronavirus is one element. But a time when commodity traders will pay you to take oil their oil. A fuel without energy, a commodity without value, a baseline index worth less than ifevery barrel of oil stayed put in the ground. There are memes now of drivers who go to petrol stations to fill up their cars and are given atanker truck of fuel in return. So what has happened this past week? Why has oil, which five years ago would cost you $127 a barrel is now worth, in the case of West Texas Intermediate (WTI)– 530 a barrel.Commodity dealers will pay you to take the stuff off their hands. There are tankers laden with the stuff anchored off most major ports, there are storage facilitiesthat are bursting at the seams with it, and there are commodity deals who would fill every pot and bottle if they could and hide it away in mines until such a time as crude rises. So what has happened this past week? Why has oil, which five years ago would cost you $127 abarrel is now worth, in the case of West Texas Intermediate (WTI) – $30 a barrel. Commoditydealers will pay you to take the stuff off their hands. Storing oil in vast quantities Of course, nothing is as simple as it sounds. And no, unless you've got some form of storing oil in vast quantities, like tanks, trainloads of tankers cars, or a fleet of oil tanker vessels – does thisprice apply. In a nutshell- oil is cheap, there's lots of it, and no one is using it. If you want to sound intelligent during this lockdown or the next time you're on a Zoom call and the topic comes up, use can explain the collapse something like this Remember that basic law ofsupply and demand? The more something is in demand, the higher the price. Or the more people demand something. the higher the price. Now turn that price dynamic on its head. There's a supply that no one wants - the price falls. And when no one wants it, the price falls. And when you only have a limited room to turn off the supply, the price falls. And when you'rerunning out of room to store it, the price falls. That's what's happened That -$30 price is being offered by sellers right now for oil to be delivered in May. The May futures price – the price for delivery then – was set on April 21 and it was influenced by a one-third decrease in demand for fuel. Factories are mostly shut around the world, planes aren't flying, cars aren't being driven and -in the northem hemisphere, homes don't need to be heated. That means there's much less demand. And prices go down. In the US, which has become mostly self-sufficient in oil because of the growth in fracking overthe past decades, storage facilities are full. But fracking is a costly way of getting oil – both in terms of the environment and economics. As long as it's worth their while, frackers keep producing but store their excess product for atime when the prices are higher and when demand requires it. But storage tanks are full. Full storage tanks forces the price down in a big way. And when those tanks are full, the traders need to find other ways storing the excess. And the most cost effective way of doing that is to drive the price lower. Not just about storage But of course, this isn't just about storage. For the past two months, Saudi Arabia and Russia – behemoths in the oil producing world -have been engaged in a standoff. Let's go back to carly in 2020 – when the pandemic was just beginning Oil was already fallingin price because the global economy had been starting to slow. SEM Slowing economy means lower oil prices. And the Saudis wanted to cut production further to keep prices stable. The Russians adamantly disagreed – they wanted to produce more. OPEC, (currently, the Organization has a total of 13 Member Countries.) members and others were in disagreementon what to do. In December 2019, oil was at S67 a barrel. In January, it was S63, and in February it was at $56. And by early March, it was at $36. And that's when Saudi Arabia decided to open its taps, adding another 2.6 million barrels daily to the market. But why flood the market when prices are lower? Well, that's when production costs really comeinto play. Page 3 of 5 The Saudi's can bring a barrel of oil to the market with all costs paid at around $8.98 cach, Russian costs are S19.21, and shale producers have costs of at least $25 per barrel. Within days, oil started to tumble, down to the mid $20s – cheaper for buyers in Europe,Russia's primary market - to buy. The price war was on Along came the coronavirus. (COVID19) No one is driving, no one is working, no one is flying. No one is heating homes or using much energy – or it comes from power from renewable sources. No one is buying much oil. And theprice drops. Even things are stable on the geopolitical front – no threats to global oil supplies - becauseeveryone is too busy staying safe from Covid-19. So when carlier this week the price of oil fell into negative territory, it's because there was noroom to store stuff being ordered for delivery in May. WTI is based on delivery from one place – Cushing, Oklahoma, where oil is moved to fromacross America and stored for physical delivery. That's the price that has collapsed. No, those memes where you drive away with an oil tanker for filling your car are tautology. Govemments draw a lot of money into their coffers from excise duties on fuel – so most driverswon't be paying much less at the pumps. But with oil so low now, it's a clear sign of the economic woes still facing us at the end of thispandemic. The students are required to answer the following questions. (Draw the diagram where it is required) QUESTION-1 ( CLO3) 1.1. Considering the present case "Examine the law of demand and law of supply". ( 2 marks) ( 50-60 words) 1.2. Read the case and examine the reasons for the low price/or negative prices of the oil. ( 2marks) ( 50-0 words) 1.3. Examine the impact of COVID19 on oil market. (1 mark) (20-30 words) QUESTION-2 (CLO4) ( 5 marks) 2.1. Analyze the impact of COVID19-on various sector (demand and supply) affecting the economy, locally and internationally, on local and global economy. QUESTION-3 (CLO5) ( 5 marks) 3.1 Evaluate "Post COVID-19" impact on the economy. Give your opinion.

Answer rating: 100% (QA)

A Considering the present case Examine the law of demand supply There is a lot to be learned about supply and demand from recent events in the oil market In essence the law of demand dictates that there is a negative relationship between price and quantity demanded when price goes up demand goes down In the case of the oil market demand was very low due to the economic shutdown and so prices had to literally go negative in order to cause enough oil demand to move contracts In terms of supply the law of supply dictates that the ... View the full answer