Explanation Of The Negative Oil Price And Its Impact On Saudi Arabia
JAKARTA - Lockdown policies in many countries due to the COVID-19 pandemic have forced factories to close. Besides, people stopped traveling. Practically, it shakes up the world economy. The crude oil sector is no exception. The day before yesterday, the black gold price touched negative numbers.
Then, does that mean that oil is given free of charge and we even get money? Then, how will it affect big oil producers like Saudi Arabia?
According to the World Economic Forum, the paralysis of economic activity due to the pandemic has caused oil demand to fall by around 29 million barrels per day, from the original 100 million barrels. Slumping demand forced oil-exporting countries, OPEC and other big producers to cut oil production by as much as 9.7 million barrels per day.
In addition, the cessation of factories, private vehicles and other transportation activities has left a lot of oil retained. As a result, oil stock storage tanks in many countries remain fully stocked.
How can it be negative?
The first thing you need to know is that the price of oil that has plummeted to the point of being in negative territory is the price of crude oil futures contracts. A futures contract is a contract to purchase oil for a certain period. For example, if we want to buy oil for the next month, the futures contract is now being traded.
Many speculators trade this futures contract like buying and selling shares. For example, if we want to become an oil trader, we can buy crude oil futures contracts starting from 1 lot (100 barrels).
However, there are also parties who trade it because they use the crude oil. For example, oil refineries and the airline industry.
Second, what you need to know is that there are various types of crude oil, such as Alberta, West Texas Intermediate (WTI), Brent and many more. The difference is seen from the characteristics of the oil, such as the level of density and sulfur content.
Meanwhile, according to the World Economic Forum, the prices dropped were WTI and Alberta types of crude. And the price is completely negative. You could say that the price of crude oil is the lowest in history.
The day before yesterday, April 21, the price of WTI-type futures oil ended at -37 US dollars per barrel. This price is for the May delivery period whose contract ended on Monday. The Alberta type is usually priced at 10-15 US dollars lower than the WTI price.
Why did it come to a minus? Because owners of futures or future contracts are trying to dispose of their contracts before the oil is actually shipped with no place to store it.
For producers themselves, providing oil for free and even paying for anyone who takes oil in the May period is considered cheaper than having to pay to cover production costs because the reservoirs are full.
Reportedly, according to the World Economic Forum, several large oil producers have had to save their excess oil production at sea by renting tankers at high costs, reaching more than 100 thousand US dollars per day for each tanker.
Impact on Saudi Arabia
One of the largest oil producing countries of Saudi Arabia, its economy is heavily dependent on revenue from this sector. Oil revenues represent about 50 percent of their GDP.
This is because the percentage of Saudi Arabia's exports from this sector has reached 90 percent. For Saudi Arabia, to be able to make money alone, the price of oil must be more than 20 US dollars per barrel.
And they need a price of at least 80 US dollars per barrel to balance the government budget.
The longer the COVID-19 pandemic lasts, the greater the economic damage suffered by oil producers.