We are living in truly turbulent unusual times! Bit of an understatement.
One of the real curveball situations involves the current crude oil pricing being quoted in the US markets this week. This is the first time in history that spot crude oil is being quoted as negative. That means the producers are paying the customers to take the oil!
But what does this really mean, and what does it mean to all the downstream consumers (all of us)?
Firstly, do not expect to be paid to fill your tanks when you go to get petrol or diesel at the service station. The pricing of these are a little different. There are a lot of production factors that need to be considered before the final price of fuels can be determined, but we can expect the price of fuel goods to fall somewhat.
Secondly, this is only a short term price issue, and future prices are tipped to go back to our normal levels.
Why do prices vary like this? Many factors impact crude oil pricing, but the key factors are supply and demand – pretty basic.
Supply can be influenced by too much or too little being available to the market, and at the moment, there is definitely too much being available.
Demand can be influenced primarily by global economic activity and the increasing oil consumption of Developing Nations. At the moment, demand is low because both economic activity and nation development are at all-time lows; therefore, not much fuel and oil products are being purchased, and storage is full or almost full across the globe.
The big problem for the crude oil industries (also known as Petrochemical industries) is that they are high lead time industries. They are expensive and slow to construct. They are also expensive and slow to wind down and, in some cases, once stopped, cannot be restarted.
It takes a lot of time and effort to slow production at an oil well, and it can be dangerous just to shut the valve. So all these oil production and refining processes are tied together and take a long time to throttle back in a safe, controlled manner. There is a lot of product at varying stages of production, and each stage will exhibit a special suite of challenges and dangers that must be addressed.
These oil production and refining facilities can be slowed, but it takes time, and once they are slowed, the same problem occurs on the production lifting phase, it is a slow and sometimes dangerous process. Add to this the fact that the countries that produce oils will not necessarily be in agreement regarding production volumes, and then you start to understand the complexities of this critical supply chain.
One more consideration here is that oil and all the downstream products are perishable and have a limited life, and to be honest for most products that life is not much more than a month before characteristics change, and the products become unsuitable for the original application.
So, we may see some pricing relief at the petrol station, but it is expected to be short-lived, and we may experience a price overshoot as world demand increases and demand outstrips supply. Only time will complete this story.
This is all outside our control and we are passengers in the current social and economic environment. So, all we can do is work within the areas of our control and hope for more favourable, stable conditions in the coming months.
Stay safe and well!