Positive to negative : The Oil Story

We all heard when the oil prices of the barrels decreased to negatives creating havoc in the international oil market. But who decided those prices?

In this segment, we are going to explore the world market of oil and try to answer this question.

OPEC is the key player in the oil market, but what is OPEC?

OPEC is the Organization of the Petroleum Exporting Countries is an intergovernmental organization of 13 countries that come together to set the prices of the barrels of the oil and sell it to all the countries depending on the demand and supply of the oil in the international market. Following its Statute, the mission of the Organization of the Petroleum Exporting Countries (OPEC) is to coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry. The founder countries of the organization are the Republic of Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. This was started in the 1960s.

Price of oil

The price of oil is determined by the forces of supply and demand, in close supervision of OPEC. This maintains its uniformity for all the buying countries of the world. But we have an option to lock the prices before. The price of oil as we know it is set in the oil futures market. An oil futures contract is a binding agreement that gives one the right to purchase oil by the barrel at a predefined price on a predefined date in the future. Under a futures contract, both the buyer and the seller are obligated to fulfill their side of the transaction on the specified date.

Covid-19 and Oil

With the onset of covid, the movement stopped for months and transportation wasn’t being used, the oil demand fell. US, the country with the highest demand for oil, plunged below its maximum demand and the supply was in excess. This made the prices of the barrels go down. The difference between the supply and demand was excessive and couldn’t be recovered in short term.

With oil demand falling and supply proving harder than expected to control, US storage sites made their way up to max capacity. Negative pricing has been a common trend in commodity markets for example, US natural gas markets once had fallen negative due to the dearth of pipeline space.

It’s been a year since the crude oil prices made history by trading and settling in negative territory, and while prices have recovered to trade above pre-COVID 19 levels, that day won’t be soon forgotten.

Author: Anoushka Miglani