Oil Prices Crash into Negative Territory


For the first time in history (4/20), oil, the resource once hailed as liquid gold, is facing its biggest crisis as its prices enter the negative zone. The catastrophe of entering the negative zone indicates that oil companies are essentially paying customers to take their oil. The ongoing pandemic played a prominent role in this crisis, as the lockdown enforced by governments led factories to close and people to stop traveling. Subsequently, the global demand for oil has decreased by a whopping 29 million barrels per day. Storage capacity on land has quickly filled up as well, as many importing oil countries have purchased large quantities of oil, taking advantage of the low prices that may not last. On the other hand, countries that depend heavily on oil revenue as part of their GDPs suffer the most. The future of Saudi Arabia and Russia, for one, seems bleak as oil revenues represent 50% and 39% of their GDP, respectively. The sudden plunge of oil prices is unsurprising considering the crumbling demand for oil. However, this effect is worsened by the global oversupply of crude oil along with the shortage of storage capacity. This further fuels the ongoing oil price war between oil supply powerhouses Russia and Saudi Arabia. Additionally, traders are also preparing themselves to face the expiration of the shipping contract that will end up in May. This issue was confirmed by a statement from market analyst Jeffrey Halley, "Nobody in America wants oil in the short term." Although OPEC has agreed to cut the oil production by 10%, still, market conditions continue to worsen and cause deflation through the global economy. Hence, it has become a great challenge for the central bank to maintain economic stability amidst this pandemic. Meanwhile, the average price of crude in Indonesia (Indonesian Crude Price / ICP) has decreased by 39.5%. Similar effects occurred with ICP SLC (Indonesian Crude Price - Sumatra Light Crude), which also experienced a decrease from US $ 52.18 to US $ 35.78 per barrel. The Indonesian Oil Price Team declared that the fall in oil prices is in line with the average price of crude oil in the international market. Furthermore, the plummet in crude prices that led to negative territory creates a negative sentiment toward Wall Street and IHSG performances. As some indices such as Dow Jones, S&P 500, and Nasdaq Composite tumbled upon the condition, IHSG fell by 0.82% after the opening on early Tuesday (4/21) to the unsettling level of 4,548.43. Overall, the decreasing price of oil brings negative sentiment to other sectors. Sources: Financial Times Straits Times Bloomberg CNN Indonesia CNBC Indonesia


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