In practical terms, this doesn’t mean much to the average person. We cannot (alas!) expect anyone to pay us to pull up to the Exxon station and fill our tank. But it is still important to understand why this happened.
So, to explain: Oil wells are producing more than anyone expects the world to consume, what with everything being shut down. These oil contracts require buyers to take physical delivery of the product, and while normally you can always find someone who wants your barrels of oil, even if you have to lower your price, at the moment, the excess oil has been pouring into storage tanks, and the tanks are getting kinda full.
Especially in Cushing, Okla., where you are supposed to take delivery of your WTI crude in May. As a credit analyst of my acquaintance put it, “The only buyer is some guy who can take oil in Cushing, move it outta the Roach Motel, and find a home.”
Over time, operators will match supply to demand by shutting down their wells, and eventually demand will pick up, and gas prices will climb back toward something more normal. But in our present situation, the price declined toward zero, and when it got very close to zero, things started to get weird.
For example, if you’d borrowed a bunch of money to bet that oil prices would not fall below, say, $5, and then (merciful heavens!) they went and did just that, you might have suddenly embarked upon a desperate fire sale of your oil futures — desperate enough to push prices into negative territory. I have no knowledge that this did happen, to be clear; it’s just one of many ways that very, very low oil prices could temporarily send markets careening off into the Twilight Zone.
However, when commodity prices stray into negative territory, that’s likely to be a brief round trip, and so it was. By Tuesday morning, the price had rebounded to the low, but positive, single digits. So for all the jokes about getting a job pumping gas into your own car, for the foreseeable future, we’ll still be paying BP, not the other way around.
Nor will we get the normal economic benefits of falling oil prices. In usual times — usual for the past hundred years, anyway — falling oil prices mean that consumers can drive more, fly more, have more stuff delivered. Or they can just take the money they were spending on fuel and put it toward something else. This makes everyone richer, and more cheerful about their finances, which can make everyone richer still through the magic of consumer confidence.
Unfortunately, it will take more than extra-cheap gasoline to get us out of our houses at the moment; as an economist would say, our demand for oil is suddenly highly inelastic. Which means that oil, one of the most important raw materials to our economy, is maybe less important to most of us as an input than as an indicator.
That is, you can think of the price of oil futures as a kind of economic forecast. Right now that forecast is paralytically depressed about May, hardly more cheerful about June, deeply dolorous about the prospects for the rest of the year and morose about 2021. That potential future matters to each of us, even if practically free oil doesn’t.
Sadly, in the short-term, that forecast is likely to be accurate. But as the forecast stretches out, remember that our current situation, early in a terrifying new pandemic, is something like a near-zero oil price — perilously close to Twilight Zone territory, if not actually there already.
Suddenly, the most important fact of our lives is the thing we know least about. Much of our current “knowledge” about the novel coronavirus will turn out to be wrong. Over the coming months and years, we will also learn things about the virus that matter immensely — possibly including things we can’t currently imagine.
So while the May and June contracts should make you pessimistic about oil prices, and pretty worried about the economy, remember that just as wheat traders didn’t predict covid-19 eight months ago, today’s oil traders can’t make accurate predictions beyond the very near future. Here in the Twilight Zone, looking beyond a month or two, all any of us can do is make some wild guesses, lay our bets and wait for the next surprise twist.