Well, it’s been another crazy week in the oil markets. Crude oil futures contracts for May expired earlier this week, and with so little demand for oil, no one was willing to buy them! As a result, traders ended up having to pay to have these futures contracts taken off their hands. The end result: prices went negative.
Here’s what we’ll cover below:
- What is an oil futures contract?
- No demand for oil, and nowhere to store it
- Why did oil prices go negative?
- What does this mean for heating oil prices?
What is an Oil Futures Contract?
An oil futures contract is an agreement to buy oil at a future date at a predetermined price. Traders buy these contracts with the hope that the price for oil goes up. When this happens, the trader can then sell the contract for a profit. With that in mind, there’s always the risk that the price for oil goes down. When this happens, the trader may take a hit when selling the contract.
No Demand For Oil, and Nowhere to Store It
The COVID-19 pandemic has brought global travel to a halt. With schools and non-essential businesses closed, and trips cancelled, there are almost no airplanes in the sky, and very few drivers on the road. In fact, there are so few drivers on the road that accident insurance claims have fallen by as much as 60% in recent weeks.
Despite there being almost no demand for oil, it is still being pumped out of the ground. As a result, storage tanks are at capacity all throughout the country. There is simply no good place to store oil at this time.
Why Did Crude Oil Prices Go Negative?
With almost no demand for oil, and nowhere to store the oil being pumped out of the ground, traders were left with May futures contracts that were expiring this week. If they did not sell these contracts, the traders would have had to take delivery of actual barrels of oil next month. For a trader sitting behind a desk somewhere, this would be a big problem! Traders frantically did whatever they could to get rid of these contracts, and eventually started offering money for people to take them.
What Does This Mean For Heating Oil?
Heating oil prices tend to lag slightly behind crude prices. As such, we’ve seen heating oil prices adjust accordingly in the past two days since crude futures prices dropped. For those of you who remember heating oil prices north of $4 a gallon some years back, paying under $1.50 a gallon feels pretty good right about now!!
If you’ve got room in your tank, now would be a great time to fill up.