For the first time in recorded history, the price of oil in the US has dropped below $0 per barrel. What does this mean for our country?
In a nutshell, it means that some oil producers in the US are going to go bankrupt – and China will benefit.
The Facts
The reason that the May price dropped below $0 is because there is no demand. Not enough people are traveling and not enough planes are flying to increase demand. And because the domestic producers didn’t slow down soon enough there is a lot of oil and not enough storage.
In other words, storage is more valuable than oil in May. What that means for America is that our oil producers are going to be paying buyers to take the oil and that could mean bankruptcy for some producers.
According to The Washington Examiner:
“The paper market contracts are expiring, and the physical market is running out of places to put the crude oil oversupply, while demand remains on lockdown and could deteriorate further as recovery remains elusive,” said Frank Verrastro, senior vice president of the energy and national security program at the Center for Strategic and International Studies. “The combination is crushing oil prices.”
Holders of the paper contracts for West Texas crude must take delivery of the oil and with no storage available the buyers are just not there. The producers then have to pay people or companies with storage space to take the oil with the closing price for the May contracts at more than -$37/barrel.
President Trump announced that he is filling up the strategic petroleum reserves with 75 million barrels of oil. The storage facilities are in Texas and can hold more than 700 million barrels of oil.
What the sub-zero dip means for American consumers is that gas will be cheaper, but we will still not be traveling much in May.
China wins big
The oil crash is a big win for China, which imports almost all of its oil and gas. The Chinese government has been filling the country’s strategic reserves since the oil market started to crash in March.
Even though the headline sounds apocalyptic, as Jim Cramer said, “No, oil is not worth nothing!” In fact, the June oil futures are trading at $21/barrel. As the economies in each of the states start to open, and people start to travel more, the demand for oil will grow as will the price per barrel.
As Stuart Varney said, “we can’t enjoy cheap gas until we start driving again.”
Read the whole story here.
Watch Stuart Varney explain the dangers to our oil industry and the advantage China gains due to low oil prices:
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