COVID-19 and Oil Price
What does COVID-19 have to do with oil prices?
At refineries, planners and traders forecast how much crude to buy based on forecasted demand. Those forecasts would normally be off by plus or minus a few percentage points.
As the time of future deliveries, demand is now known and last minute decisions are made to either buy/sell a small percentage of oil in order to balance demand and supply.
The last minute decisions can only be done on a speculative open market.
In the current COVID-19 scenario, the sudden in demand has resulted in refineries not taking massive amounts of crude.
This not withstanding that refineries would have some storage. Privately owned “tank farms” together with oil tankers would also provide a limited storage buffer for the markets. However these storage options may not be enough in the short term.
The current COVID-19 scenario unfolded in less than one month, a shorter period than the term of the traded contracts. Storage became constrained and something had to give.
Any trader left stuck with extra oil on their hands would have to pay storage buffers to off take the unwanted oil. That’s why market prices went negative
1. Should the terms of the oil trading future contracts be shortened to be less than one month?
2. Should nations agreed to a more phased and slower shut down of their economies in order to better manage the constrains?
3. Should pandemic related force majeure clauses be included in oil contracts?