Oil: Future Contracts, and Sub-Zero Prices (April 20th 2020 Explained) | Money Masters

Oil: Future Contracts, and Sub-Zero Prices (April 20th 2020 Explained)

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Oil is an essential commodity for the modern world to operate, so why would oil producers be paying for oil to be taken off their hands?

Crude oil is used for manufacturing plastics, heating buildings, produce electricity, and of course propelling vehicles. Oil is critical for our world economy to function and has wide implications. Back on April 20th, 2020, news outlets reported that the price of oil dropped below $0. How could oil ever have a negative price?

The short answer, it never did. Instead, oil futures for a single day went below zero. This article will explain: What happened to oil? What are futures? What is the role of futures in the oil market?

To begin, the Covid-19 pandemic and start of lockdown measures halted the world. The global economy doesn’t operate day to day and cannot pivot direction quickly if requested. Several months before Covid-19 lockdown started, oil producers had set their expectations for how much oil the world would need. When government officials told their citizens to stay at home, global oil demand immediately dropped. With everybody at home, there was no longer such a high need for oil. A drop in the need for oil creates a drop in economic demand.

The short answer, it never did. Instead, oil futures for a single day went below zero. This article will explain: What happened to oil? What are futures? What is the role of futures in the oil market?

To begin, the Covid-19 pandemic and start of lockdown measures halted the world. The global economy doesn’t operate day to day and cannot pivot direction quickly if requested. Several months before Covid-19 lockdown started, oil producers had set their expectations for how much oil the world would need. When government officials told their citizens to stay at home, global oil demand immediately dropped. With everybody at home, there was no longer such a high need for oil. A drop in the need for oil creates a drop in economic demand.

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