April 20 brought on panic in the markets when crude oil prices dropped to unprecedented lows. Now let’s break down the reason for this phenomenon.
Sellers are paying buyers to take the oil off them. This role reversal was fueled by growing stockpiles sitting in the seller’s warehouses as they ran out of space for incoming supplies.
When the prices hit $-40, that meant the sellers were paying buyers $40 to offload their oil from their inventory.
These sellers are taking this hit in the belief that it is temporary, that oil prices will rally and they will reconcile the losses they just incurred.
As the US joined the oil exporting world in the production of crude oil, oversupply became more likely which led to storage capacity filling up.
As dwindling air travel and mobility continues due to global lockdowns, more remains to be seen on when crude oil will rally. If the lockdowns are ended early, oil demand will increase again and set the prices on an upward trajectory.