Corona Virus is becoming very similar to the Lehman Brothers for the whole world. As a result, future Crude oil contracts in the May series are trading below $0. It means that Oil producers are paying part of your expenses of refining and storage. What if all this is happening? In this post, I am going to talk about it.

Let’s start with Understanding what is future contracts of Crude oil.

Production of crude oil is taking place all around the world. OPEC, or Organization of Petroleum Exporting Countries, is the leading procedure group that produces a large part of it. It was founded in Baghdad, Iraq, in 1960. Islamic Republic of Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela were founder members of OPEC. In addition, Algeria, Angola, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, UAE, and Venezuela are member countries.

As America and Russia are industrially developed, they always need Crude oil and petroleum products for their growth. So they started using different Technology to search for Crude oil.

When such a situation arises, it isn’t easy to decode the price. For example, different countries have different costs, from $6 to $12 per Barrel. But when you can sell the same product at two different prices, a unique situation arises, which is called arbitrage.

The simultaneous buying and selling of securities, currency, or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same asset.

In a simple word, If OPEC sells the same quality oil for $30, but in the market of America, the same is sold for $40, you can earn a riskless profit of $10 per Barrel, assuming there is no cost of logistics.

This is one situation. what if I don’t want oil today, but I want it to say after two months. I will try to buy at a specific price, and I will try to reduce the risk of price change. So I will make one contract with OPEC that gives me 500 barrels of oil on 20 June at the price of $20 per Barrel. On 22 April, I will make a contract about the oil price, which is bound for me and OPEC. No matter the price on 20 June, I will receive it at $20 barrel. So If the price went to $40 per Barrel, I would be in profit. If the actual price came out to be $10, OPEC would be in profit.

This is called Derivative. There are many different types of derivatives. I am explaining one of the simplest.

They are perfect for pricing as there are many markets where oil is traded physically but very few markets where DERIVATIVES decide the price. So the cost of these derivatives is used for pricing the natural oil.

There are two types of oil prices you can see. WTI and BRENT. West Texas Intermediate or WTI is essentially US oil price as they are also one producer. BRENT CRUDE is an international price. Generally, a large part of this WTI is shale oil. A little bit of expensive Technology. It cost around $40. But there is one plus point and one minus point. This shale oil is drilled from the deep earth with immense pressure. So once you find it, you can’t stop the production. Plus point is the life of this drill is significantly less. If the producer doesn’t have the capacity for the storage, they will not drill it. So the possibility will be this situation will not live longer.

Now come to the real question? Effect of corona on the Oil Industry.

Trump tweeted…

As there is a possibility that a Lockdown in the market of India will be till 3 May, even after that, economic activity will take time to start, and as India is the biggest oil importer (the US consumes but now there is consumption is lower, and they produce more, they cant use it all. China is starting itself, but much will be the demand we can’t say, and China buy based on BRENT, we can say that OIL GLUT will, keep ongoing. There is a strong possibility that some oil companies may go bankrupt. That negative revenue is now one thing. On the other hand, big companies may survive, and there may be fewer producers than today. That may support prices in the future. US government may need to bail out their Oil product. As in today’s world, we are already facing negative interest rates. Now we have one more event that we can’t explain with the help of classical economics.

The bigger question is will this help the US economy, or will they fail to use this opportunity even if this is an opportunity for many industries they are not in a position to use it. This will affect Solar energy and the use of other renewable energy. Trump Government was trying to keep some industries alive, and OIL is one out of it. How this will affect to US Presidential race is one question. One important thing is whether This is happening in the FUTURE market? Not, in reality, so Now many people need to see what will happen in the US in MAY.