As we reported at the beginning of this month, fuel prices are sliding rapidly downward, as demand for gasoline and other petroleum products drops from the worldwide stay-at-home orders.
As a result of this at the start of April, the national average for fuel prices in the United States crossed the $2/gallon mark, and currently prices are being tracked at $1.77/gallon in the USA.
That figure is likely to drop even further though, as the price for a contract future on a barrel of oil has actually dipped into the negative figures (-$37.63/barrel) – an historical first and an alarming event.
Before there is any confusion on what that means, we should explain how the supply chain for oil production works, and how barrels of crude oil are bought and traded on the market.
For starters, the supply chain for oil is very slow and very long. It takes a lot of effort to pump oil out of the ground, and even longer to transport the oil (often by sea, but sometimes by pipeline, train, or truck) to an oil refinery.
In the case of over-water transport, we are talking about a duration of time measured in weeks, if not months, for routes coming to the United States.
This means it take a long time for the rate of oil production to speed up or slow down, and to manage the variability in that demand and supply, refineries and ports have storage containers that they use to even out the market.
But, right now those tanks are full. Oil refineries have little demand for the crude oil that is on tanker ships right now and bound for America. Furthermore, there are serious costs that come from having a tanker sitting off a port, waiting to unload its oil, which means logjams in the crude oil supply chain are very expensive affairs for the oil companies.
Therefore, it is often cheaper for a refinery to slash prices on crude oil, so they can make room for the new incoming crude oil.
Compounding this though is how crude oil is bought, and the fact that contracts for oil purchasing are traded on the open market (e.g. oil futures). Oil contracts are made month-by-month, and oil futures mature on set dates. Tomorrow, the oil futures for May will mature, and as we noted before, there is currently a serious logjam in the crude oil supply chain.
So, producers and refineries are fire-selling their crude oil. Today we see the shocking price of -$37/barrel, but this figure will be short-lived, likely for the next day, and then will stabilize on the June contract rate, which is just above $20/barrel.
While more of a quick glitch in the supply and demand curves, because of how oil futures and oil production works, the headline-grabbing news story is an interesting moment in time while we battle the coronavirus outbreak.
While we expect oil prices to stabilize in the next few days again, the price for a gallon of gasoline is likely to continue to drop, even after a major production agreement between Saudi Arabia and Russia was reached earlier this month (there is talk that this deal is already breaking down).
Unfortunately, this is our new normal until the world returns back to the way it was. On the bright side, gas is going to be cheap for a while.
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