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Article Summary
This article describes the latest oil prices crash that may be defined as historic. According to the May delivery contract traded for less than zero, the price for West Texas Intermediate crude “fell more than $55 to settle at a negative $37.63 a barrel on Nymex” (Coy, 2020, para. 6). Negative prices are caused by the attempts of speculators “to get out of their contracts before expiration” as the oil market is overstocked (Coy, 2020, para. 9). Despite the fact that this decline is regarded as a temporary phenomenon, the United States Oil Fund started to sell May contracts and remove its price support.
Economic Concept
The article refers to the concept of elasticity with reference to the oil market. The supply and demand for oil may be balanced in the long term, however, in the short term, they are inelastic. It is substantially expensive to stop pumping crude temporarily, and that is why the oil supply is inelastic to unsuspected external conditions. In turn, the oil demand is inelastic as well, as the market cannot start to consume more oil due to its production rate. This situation inevitably leads to oil overproduction and a lack of storage.
Opinion
From a personal perspective, the oil market will subsequently stabilize due to the balance of the oil demand and supply in the future. After the cancellation of quarantine restrictions established due to Covid-19, the oil demand will substantially increase. At the same time, the oil production will relatively reduce as negative prices have a perverse effect on the economics of suppliers as well. At the same time, it was interesting to know what measures have been already taken to overcome this crisis and the attitude of leading financial experts concerning it.
Reference
Coy, P. (2020). The Oil Price Crash in One Word: ‘Inelasticity.’ Bloomberg Businessweek. Web.
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