Crude oil plunges to - $37.63 a barrel for the first time in history
With the coronavirus pandemic break out, the financial markets are seeing a lot of volatility and uncertainty. One such event was seen in the oil market on Monday. The demand for crude oil crashed globally leading to the price of the crude oil falling down to - $37.63 a barrel.This is the first time oil prices have turned negative. The negative price suggests that the sellers are literally paying the buyers to take deliveries in order to avoid paying for the storage cost.
The crude oil price at the beginning of the year was over $60 a barrel. Read on to know what led to the fall in crude oil prices and what should be your trading strategy in such a scenario.
Reason for fall in the crude oil price
The major reason contributing to this fall is the excess unused oil kept with American energy companies. The COVID-19 pandemic has brought the world economy to a standstill. In spite of low demand, around 100 million barrels of crude oil are produced in a single day. The excess production is despite a deal with many nations to cut the production of oil including Russia, Saudi Arabia, among others. Owing to this, the world is facing a problem to store all the oil the industries are pumping out. As per the energy expects, the estimated total storage space in the world is around 6.8 billion barrels of which around 60% is already filled.
Besides, oil is traded on its future price and May futures contracts are due to expire on Tuesday. Because of this, most of the traders offloaded their holdings to avoid taking deliveries and incurring storage costs.
What does the future look like?
The oil infrastructure around the globe is quite complicated and the situation is likely to take time to come back to normal. It is not so easy to immediately fix the oil industry problem. Moreover, countries like Russia and Saudi Arabia whose economy majorly relies on oil are reluctant to curtail the production. Besides, shutting down the oil wells can prove to be a costly affair as it would require expensive equipment and manpower to restart operations when the demand returns.
What should be your tradingstrategy?
In these unprecedented times, commodity, specially the high beta commodities like Crude oil is moving on life time and historic volatility. As a trader you have to be very clear with your risk appetite and the choice of trading instruments, specially if you are leaving your positions open overnight. One cannot deny the possibility of this fire sale kind of situation happening in future again. Therefore, traders with low to medium risk appetite should clearly shy away from trading in these high volatile commodities in these uncertain markets.
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