The business slowdown resulting from the worldwide COVID-19 pandemic has created a global glut of oil. Production has not adjusted to keep pace, so storage facilities are full and the price of oil has dropped a great deal over the past few months. On Jan. 1 it was about $64 per barrel. On April 20 the dam burst completely and the price for oil to be delivered in May plunged from about $18 per barrel to a -$40 per barrel in intra-day trading. When the oil market closed it stood at lower than -$37 per barrel.
Oil pricing is kind of a black art that is determined by the shippers, not the producers. It is directly linked to both supply and demand. and is based on future deliveries. At this time supply is up and demand is down. The result? Lower prices.
I can hear the cheers coming from you gas guzzler owners out there in cyberland who remember $5 per gallon gas not too long ago, as we’ve seen gasoline prices drop at the pump recently. Yes, it has been nice to fill up at throwback prices, but in the long run the instability may end up driving some of the producers out of business. Ultimately that would be bad for everyone, especially folks like us with the older, less efficient cars.
A negative price for oil has never happened. What it means is that producers will have to pay a third party to take the oil away. In essence it has no value.
With the advent of fracking techniques the U.S. has become a major producer of oil. Fracking is short for hydraulic fracturing, which is a well stimulation technique in which rock is fractured by a pressurized liquid. The process involves the high-pressure injection of ‘fracking fluid’ into a well bore to create cracks in the deep-rock formations through which natural gas, petroleum, and brine will flow more freely.
Other major producers are Russia and Saudi Arabia. The U.S. brokered a deal involving Russia, Saudi Arabia, the U.S. and Mexico to reduce production. But it does not go into effect until May 1 and may not be enough to stabilize the market. What is needed most is an uptick in demand.
Economies worldwide are beginning to reopen at a gradual pace and this will help reduce the oil glut. Meanwhile, we can do our part by continuing to drive our classics as much as possible and keep filling up.