San José, CA – Earlier in the day, I glanced at oil prices and saw that they were down 40% for the day at about $10 a barrel. Pretty bad, I thought. Then after financial markets closed, I got a call about it. I looked and saw that the closing price was negative $37.63 and let out an f-bomb, the first of about a half a dozen in my three minute conversation.

Oil futures for May fell more than 300%, from $18.27 on Friday, April 17, to deep in negative prices on Monday, April 20. With futures for June down but still at positive at about $20 a barrel, typically speculators could profit by buying the cheap May future, taking the oil delivery, and then selling the June future and delivering the oil in June. Normally this arbitrage would keep the futures prices within about $10 of each other. But the world is so awash in oil that there is almost no place to store extra oil in the United States. Thus, speculators and hedge funds were willing to pay to take the oil off their hands.

This crisis of overproduction in the oil market is mainly because of the steep drop in oil purchases because of the worldwide recession triggered by the COVID-19 pandemic. Socialist China, where the pandemic began, had to lock down their country in a successful attempt to control the virus. New infections are now down to less than 100 per day, many, if not most, from Chinese returning from other countries. But the cost was steep, as the total production of goods and services, or GDP, fell more than 6% from a year earlier. This is China’s first fall in GDP since they began to report it in 1992. Even though China’s manufacturing is returning, service industries are slower to come back. Now that China has become the world’s largest importer of oil, world oil markets took a big hit.

But the pandemic situation in Europe, another major oil importer, is much worse. Despite the news about ‘reopening’ some of the economies, COVID-19 is still raging, with the United Kingdom alone reporting almost 6000 new infections. Together with Spain, Italy, Germany, Belgium and the Netherlands, each of which had over 1000 new infections reported, and other European Union countries, there were about 20,000 new COVID-19 cases despite stay-at-home orders across the continent. This has cut deeply into European imports of oil.

But Europe pales beside the United States, with almost 30,000 new infections reported, and much of the country (but not all) trying to stay at home. More than 20 million people in the United States have lost their jobs in just the last four weeks, and layoffs continue. Oil consumption in the United States has fallen by one-third just in the last month. The United States is still the world’s largest consumer of oil, which puts a huge dent in world oil consumption. While the U.S. is no longer a big oil importer, the drop in consumption means that the extra oil is piling up in the United States.

While not the main reason, a trigger for the recent collapse in the price of oil even before today was a price war between Saudi Arabia and Russia, the two biggest oil producers. While they were trying to gain market share from each other, they had a mutual target in mind: U.S. oil producers, where it is more costly to produce oil.

Even though the price of oil is now well below the cost of producing oil in the United States, U.S. oil companies cannot just turn off production. The big increase in U.S. oil production over the last ten years has been shale oil. The hydraulic fracturing or fracking process has never been turned off before and could lead to equipment damages or even not being able to restart production.

The drop in oil prices dragged down the stock market on Monday, with the Dow Jones Industrial Average down almost 600 points or 2.5%. The Dow has fallen 20% from its all-time high earlier this year as Wall Street investors have faith in the huge efforts by the Federal Reserve and the federal government. In contrast, oil prices (using the barely positive $1.26 as oil prices bounced back after the close of U.S. trading) are down 97% from the beginning of the year, and show a much more pessimistic view of the real economy right now.

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