Investors were shocked to see oil prices nose dived and entered into negative territory. Oil cannot be seen as gold due to the following reasons.
1. The need for large storage facility
2. It degrades over time.
3. It cannot be considered as a store of value.
With the quarantine measures in place across the world due to the Coronavirus situation and the slowdown in the economy, the demand for oil has decreased. Hence, more capacity is needed to store oil as it is being less used. Also, there are logistic problems at the moment, which puts more stress on oil prices.
Futures contracts is one of the ways to trade the oil. Assume the futures contract expires tomorrow and there is no demand for oil at all. In this case, the buyers will be responsible for buying and storing it. So, you will not be interested in buying the contract, rather, be paid to buy and hold it. Hence, this can cause the oil to go into negative territory.
© Prabhu for Forex Videos, 2020. |
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