Crude oil price went below zero per barrel on Monday, and I was like – “What? Negative oil price? Does that mean oil companies are paying to sell their oil? Can I fill up my car’s petrol tank for free now, and get paid on top of that?”. Let us understand what the negative price really means, and how it affects the Stock Market.
How can a price go below zero?
This is for the first time in the history that crude oil price has gone below zero. With global lock-down due to Coronavirus outbreak, transportation has been greatly reduced, manufacturing has stalled, many businesses are standstill, and as a result demand for the oil has hit the bottom. This has affected the oil reserves worldwide. You cannot just buy oil and dump it in a warehouse; it requires a special facility with large storage tanks like this,
Image Source: RBN Energy
With almost zero demand and an oversupply (about 100 million barrels a day), storage space for the oil is running out. Also, due to a lack of sufficient storage, the cost of storage has also gone up (almost doubled at many locations), which is making oil sellers difficult to hold the oil reserves. They are literally paying money to buyers for taking away the oil. This was reflected in the crude oil prices to go below zero.
Are we going to get free petrol (gasoline), and get paid for buying it?
Only in your fantasy. Sorry, no good news here. Crude oil goes through a refinement process to produce petrol (gasoline), diesel and other petrochemical products. The refinement process and taxes adds to the cost of the final consumer products. So, even if the crude oil price is negative, we are not going to get petrol and diesel for free anywhere in near future.
Effect on the stock market
Frankly speaking, there is no direct correlation of oil prices on the stock prices. Stock prices fluctuate based on a lot of other factors, and cannot move based on just one commodity. But if you think logically, stock prices move based on people’s emotions (which can be irrational sometimes). If you ask me, I will focus on these two of the most affected sectors because of oil prices,
Effect on Transportation
Without a doubt, fuel is a major cost to the transportation companies. With reduced crude oil prices, fuel prices will also drop. That means higher margin and more profits for the transportation industry.
However, with current lock-down situation, even that is not possible because transportation is also at a halt. It’s really a unique situation, and a tricky one indeed.
Effect on Manufacturing
Many manufacturing companies use crude oil for various purposes. For example, many industrial chemicals are manufactured using the extracted elements during oil refinement process. Reduced crude oil prices mean getting these elements cheaper, improving the margins.
Again, during this COVID-19 crisis, manufacturing industry is also hit. If the situation continues or worsens, many companies will come up with a week balance sheets at the end of this quarter (and not limited to these two sectors).
I would suggest keeping the stocks in these two sectors in your watch-list. I am a big follower of Technical Analysis. If market is thinking bullish on the future prospects for these industries, it will surely reflect in the stock prices. Keep an eye and be a buyer when the BUY signal is generated in the charts. That is all I can say during these uncertain times.
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