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Market Watch: Oil Futures Market Turns Upside Down

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The market changes constantly and both vendors and consumers are looking for ways to benefit from price changes, save money, and improve their ability to forecast. Fuelwonk has the only nationwide database of individual vendor prices by location, monitoring thousands of propane and heating oil price points per month, comparing them to the average prices per state, and tracking changes down to the individual state, city, county, and ZIP level, and we make this wealth of data easily accessible to everyone.
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Trend should benefit consumers

Commodities futures let anyone hedge against the price of oil, and they also provide a mechanism for predicting price trends in the energy sector.  You can use that information to plan the timing of your purchases, especially during the off-season.

Commodity futures are usually fairly stable and serve to even out fluctuations in the market.  But recently a confluence of events has destabilized crude oil markets and caused anomalies that have never been seen before.  On April 20, 2020 some contracts for crude oil deliveries were sold at negative $39 per barrel.  In other words, sellers were not only giving away the oil for free, but paying buyers to take the oil off their hands.

To understand how this could happen, you have to look at the nature of oil itself.  Unlike food products and other commodities, buyers cannot just dump oil if there is temporarily no demand for it.  They have to find a place to store it.

Usually there is plenty of storage capacity for oil, but because of the COVID-19 epidemic consumption was drastically reduced.  This meant that all of the cheap storage options were already full.  Since the futures contracts obligated buyers to take possession of the oil, they would have to pay a premium price to store it.  They could not dump the oil and would have to pay more to store the oil than they could sell it for.

Farmers can dump tomatoes when the market price is too low, but you can’t just dump oil.  [University of the Sunshine Coast]

This Planet Money podcast  gives you a more complete picture of the circumstances behind the recent turmoil in the oil futures market.

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