Why are oil prices negative? Will there also be a rebate for gasoline prices?

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Why are oil prices negative? Will there also be a rebate for gasoline prices? Under the impact of the COVID-19 pandemic, international oil prices collapsed. The May futures price for West Texas Intermediate crude oil in New York plummeted by $55.9, a decrease of 306%, closing at -$37.63 per barrel. This marked the first time ever since 1983 that futures prices for oil have turned negative. This means that oil producers have to pay money to the buyers. What are the reasons behind negative oil prices? When we drive and refuel on a daily basis, could the price of gasoline even be negative? http://image.idosend.com/fkImages/18892/image/a(22).jpg 1. Why would someone who sells oil have to pay the buyer money? The price of goods is influenced by supply and demand. But the factors involved in supply and demand are not as simple as just production volume and consumption volume. From underground oil wells to car fuel tanks, crude oil goes through various stages such as extraction, storage and transportation, refining, and sale at gas stations; in each of these stages, there is a relationship between supply and demand, with all these stages being interconnected. http://image.idosend.com/fkImages/18892/image/b(16).jpg In a society that functions normally, the process from extracting oil from wells to powering the billions of cars around the world is a smooth and continuous one. For crude oil producers, shutting down wells can cause permanent damage to them; at certain times, this damage is less severe than the temporary situation of selling oil at a loss. Recently, the COVID-19 pandemic has led to a sharp drop in demand, resulting in an oversupply of crude oil. Arbitrageurs have flocked in, causing storage space to become scarce and prices to rise steadily. Under the impact of disrupted demand, oil inventory at the warehouse centers has risen rapidly. In addition to large oil tanks, the demand to rent very large crude carriers (VLCCs) for storing oil has surged, and their prices have skyrocketed. In March 2020, the plummeting oil prices spurred a surge in VLCC charter rates. On March 9, crude oil prices experienced their biggest one-day drop since the Gulf War in 1991, as a price war between Saudi Arabia and Russia could lead to an oversupply in the global oil market. Following the sharp drop in oil prices, the daily rent for VLCCs rose accordingly. On March 10, the daily charter rate for VLCCs is estimated to reach $38,700, significantly higher than $30,700 last Friday; a month ago, this figure was merely $14,800. The closing price on March 10 rose to $70,000, an increase of $31,000 in just one day. On the 11th, the highest daily rental price reached $193,000, representing a 584% increase from Friday of the previous week; it more than doubled over 5 days, and had increased by over 10 times compared to a month earlier. http://image.idosend.com/fkImages/18892/image/c(12).jpg During the special period of the COVID-19 pandemic, there was a surplus of supply over demand in the market, and storage facilities were in short supply, leading to the historic situation where those selling oil had to pay buyers money. I’m not selling it. Is it okay to just dump the oil? At this point, one might recall a classic scene from history: the \"evil capitalists\" pouring milk down the drain, refusing to give it to the poor. http://image.idosend.com/fkImages/18892/image/22222(1).jpg There are several economic reasons for this; one of them is that milk cannot be stored for long periods at low costs, so discarding it becomes a rational choice. It’s not just the “evil capitalists”; during certain periods when milk prices are low, there have also been cases of ordinary dairy farmers dumping their milk. http://image.idosend.com/fkImages/18892/image/e(3).jpg Since the price is low, why not stop selling it and just pour the oil out? The answer is no. First, the amount of oil is enormous; it’s not in the same order of magnitude as milk ； Second, its destructive impact on the environment is also not in the same order of magnitude. International oil companies make huge profits when oil prices are high, but if they accidentally pollute the environment, the fines imposed can be astronomical. http://image.idosend.com/fkImages/18892/image/f(2).jpg In 2010, the explosion of the BP Deepwater Horizon drilling platform resulted in 11 deaths, and millions of barrels of oil flowed from the Macondo well into the Gulf of Mexico. In 2015, U.S. President Obama **finalized a penalty of $20.8 billion against BP for the oil spill that occurred in 2010, setting a record for the highest fine imposed in U.S. history for environmental pollution. The U.S. District Court for the District of New Orleans found that BP was guilty of \"gross negligence\" in the 2010 explosion and oil spill at the Deepwater Horizon drilling platform in the Gulf of Mexico, and imposed a fine of $20.8 billion. On September 16, 1994, Exxon, the largest oil company in the United States, was fined $5 billion by a federal court in Alaska for causing the worst marine pollution incident in British history. On March 24, 1989, Exxon’s oil tanker Valdez ran aground in Prince William Sound, Alaska, leaking nearly 41.65 million liters of crude oil into the surrounding waters. The crude oil spill caused by Exxon’s tanker Valdez is recognized as one of the major international incidents of 1989. Hundreds of kilometers of Alaska’s coastline have been severely polluted; thousands of seabirds and aquatic animals have perished. Approximately 10,000 fishermen and local residents have been forced to shut down the fisheries and related facilities on which they depend for survival. Salmon and herring populations are on the verge of extinction, and dozens of businesses have gone bankrupt or are on the brink of collapse. Have there been negative oil prices for a long time, on a global scale? That’s impossible. To prevent the situation from worsening, most countries around the world **have asked their citizens to stay indoors. Billions of people are staying at home to curb the spread of the virus, resulting in a sharp decline in oil demand. In March this year, Saudi Arabia and Russia fell out over differences in their views on production cuts, sparking a price war for oil that once again affected the international oil market. Since the beginning of the year, WTI and Brent oil prices have dropped by more than half. On April 12, the Organization of Petroleum Exporting Countries (OPEC) reached an agreement with oil-producing partners including Russia to cut crude oil production by 9.7 million barrels per day from May to June. This historic agreement helps to support oil prices, but many experts believe that the production cuts are not enough to offset the impact of an oversupply. The International Energy Agency’s (IEA) monthly oil market report states that global daily crude oil demand in April is estimated to be 29 million barrels lower than it was a year ago, with oil consumption returning to levels seen in 1995. The excess crude oil is due, on the demand side, to the pandemic, which led to a significant decrease in transportation and travel. On the supply side, it’s because oil-producing countries have not cut back on production. Saudi Arabia and Russia, the world’s largest oil producers, oppose production cuts; the two countries continue to increase output, releasing record amounts of crude oil into the market. However, WTI futures for May delivery are not an accurate indicator of oil market conditions. WTI futures for June delivery tumbled 18%, settling at $20.43 per barrel. London Brent crude oil has switched to June delivery contracts, falling 8.9% to close at $25.57 per barrel. According to The Wall Street Journal, as international oil prices plummeted, many market participants were optimistic that the pandemic would gradually subside and economic activity would return to normal in the fall, leading to a \"super-contango\" in the oil market – a situation in which the prices of futures contracts with delivery in a few months are much higher than those of near-term contracts. Taking WTI as an example, the futures price for delivery in May 2021 was $35.52. SPA Consulting believes that after this epidemic, most U.S. shale oil producers will go bankrupt, resulting in a significant decrease in crude oil supply. As economic activities gradually return to normal in the future, and in the absence of any \"black swan\" events, international oil prices could still return to their normal level of 60-80 dollars per barrel over the next 3-5 years. For domestic car owners, can we get money back when refueling? Well... http://image.idosend.com/fkImages/18892/image/g.jpg Here are two official news articles: The first one: State-owned Assets Supervision and Administration Commission: The sharp drop in international oil prices in the first quarter led to losses for central state-owned petroleum and petrochemical enterprises. “The sharp decline in international crude oil prices resulted in significant reductions in profits for these central petroleum and petrochemical companies.” ”Peng Huagang, member of the Party Committee, secretary-general, and spokesperson of the State-owned Assets Supervision and Administration Commission of the State Council, said at a press conference on the economic performance of central state-owned enterprises in the first quarter held on April 20 that although low oil prices help reduce the costs of China’s economic operations, they have a significant impact on the production, operations, and profitability of central petroleum and petrochemical enterprises, resulting in overall losses for these enterprises in the first quarter. Specifically in the oil and petrochemical industry, international crude oil prices plummeted in the first quarter; the price of Brent crude oil dropped from $68 per barrel at the beginning of January to $23 per barrel by the end of March, a decrease of over $40 per barrel during that period. “In the first quarter, domestic demand declined; sales of refined oil products dropped by over 20%. In businesses such as exploration and refining, costs exceeded revenues. Overall, oil and petrochemical enterprises incurred losses, which slowed down the growth rate of the profits of central state-owned enterprises by 30 percentage points. ” In the refining segment, severe overcapacity is hindering the development of the entire industry. China Petroleum’s financial reports for 2019 show that, due to factors such as overcapacity in domestic refining, narrowing margins, falling prices of chemical products, and the company’s efforts to introduce market-based pricing mechanisms, the refining and chemicals division achieved an operating profit of 13.764 billion yuan last year, a decrease of 69.2% compared to the previous year. Among them, the refining business achieved an operating profit of 10.337 billion yuan, a year-on-year decrease of 72.0% ； The chemical business achieved an operating profit of 3.427 billion yuan, a year-on-year decrease of 56.2%. Article 2: As the reference international crude oil price remains below $40 per barrel, the retail pricing limits for refined oil products will not be adjusted in this round. On April 15, the **NDRC’s website reported that as of April 14, the average price of crude oil in the international markets used as a reference for domestic refined oil prices over the previous 10 working days was below $40 per barrel. In accordance with the relevant provisions of the \"Regulations on Oil Price Management\" and the \"Regulations on the Collection of Reserves for Oil Price Regulation Risks\", there will be no adjustment to the prices of gasoline and diesel this time; the amount that remains unchanged will be fully incorporated into the reserves for oil price regulation risks and handed over in its entirety to the central treasury. During this pricing period, due to the impact of the COVID-19 pandemic worldwide, oil demand dropped to low levels. Despite OPEC+ reaching the largest production cut agreement in history, this has not led to a significant rise in crude oil prices, which remain at low levels of 20-30 dollars per barrel. As a result of this, the domestic benchmark crude oil price variation rate remained in negative territory, with the average periodic crude oil price falling below the 40 dollars per barrel \"floor price\" threshold. Under the current domestic mechanism for adjusting refined oil prices, there are a \"ceiling price\" and a \"floor price\" for such adjustments. That is, when international oil prices are above $130 per barrel, the maximum retail prices for gasoline and diesel will not increase or will increase only slightly ； When the price is below $40 per barrel, the maximum retail prices for gasoline and diesel will not be reduced. When international oil prices range between $40 and $130 per barrel, the domestic refined oil pricing mechanism adjusts accordingly, rising when necessary and falling when appropriate.