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04/25/2020

The crash of crude and the end of the production economy

The crash of crude and the end of the production economy

While futures contracts for WTI (West Texas Intermediate) crude oil in the US expired in May, the price of the WTI-type oil fell by more than 300% this week, the value dropping to negative 37.63 by contract holders avoiding physical delivery of the oil.

Oil prices have fallen below zero for the first time in history in an environment where storage tanks are being rapidly filled in the United States. The global benchmark Brent type crude oil on the other hand, has moved towards the opposite direction, being traded on above $25 per barrel as a result of rising demand in China.

In early March, the global demand for oil had declined by one third due to the Coronavirus pandemic. But in an environment where refineries have halted the production, fear emerged over finding a place to store the oil. Even the recent halt of the production in the oil-producing countries was not enough to reduce millions of barrels of oil in the storage silos.

Oil contractors have begun to use miniscule amounts of crude oil, as the Coronavirus pandemic has brought the global economy to a halt. As a result of this, there is a great amount of oil left unused in the market. The American energy companies do not have enough storage silos to hold this much crude oil. No company wants to buy or keep the contracts that are about to expire, since there is not enough storage capacity to keep the oil anyway. The contractors, who had seen this coming, began to sell the West Texas Intermediate crude oil futures contracts.

We asked experts about these extraordinary events.

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‘Physical oil is taking its revenge on ‘oil on paper’”

Assoc. Prof. Volkan Özdemir, Director of the ATA Platform:

“Something has happened for the first time: the may-future oil in the US has seen negative figures! Since 1983, oil has been trading on the futures exchange, and the ‘oil on paper’ has seen negative figures for the first time ever. The futures will move back into positive figures for June, however there are still questions about how the situation is going to evolve.

In addition, I can say that financial market speculations are very far from the reality. Now everyone has seen the impacts of the financial markets and speculations on oil prices in the last two days. It is better than an applied lecture!

I can say that, in an ironic way, given the unpredicted collapse in demands, the real market (the physical oil) is taking its revenge on the financial market (‘oil on paper’)!

We are experiencing history as a result of the Coronavirus! That is what happens if the economy shifts away from actual production dynamics and toward finance. Now we have a historic opportunity ahead of us: speculative money, especially stock exchange investment funds, need to be removed from these areas and redistributed.”

“The drop may not be reflected in fuel prices”

Recep Ercin, Economic News Editor at Aydınlık:

“The situation is not all about the fact that oil prices have fallen to negative figures, it is about the speculative financial market and end-of-term contract deals. Thus, there is not actually much of a negative situation on the global oil markets. The prices have dropped because there was a surplus of supplies in the market. The issue is the trading of futures contracts. No one wants to keep their contracts because there has been a price drop.

This situation may not be reflected in the fuel prices. I do not think they will be in Turkey either.”

 
Elif İlhamoğlu
Elif İlhamoğlu is political scientist and  journalist (Turkey). She is studying for PHD on the political science and international relations department at Istanbul University (Middle East studies). She visited Middle East countries, Syria, Lebanon, Iran several times and did interviews with the leaders as Mahmoud Ahmadinejad, Hilal al-Hilal Secretary General of the Syrian Ba'ath Party.

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