Somebody help me understand. So Oil prices took a deep dive to the lowest price in 20 years. But in most countries, the price of gasoline in most countries hasn't even dropped. Why is this so?
The most reasonable reason why the price of fuel oil in various countries has not decreased even though the price of world crude oil dropped. There are several factors that determine the selling price of BBM as a basis for calculation. The main components of this calculation are the price of crude oil and the dollar exchange rate. While the other components are distribution costs, storage costs, margins, and others. One thing that should not be ignored is the period of importing crude oil for raw materials for producing BBM.
The average crude oil currently produced to be sorted into fuel is the crude oil that was imported 2 months ago when the price of crude oil was still high. So, of course, the calculation of fuel prices still refers to the price of oil in February instead of using the current price. Current prices are only used for the calculation of fuel prices over the next 2 months. That is the reason why fuel prices have not yet come down. Plus the current high dollar exchange rate makes price reductions even harder to realize. Then it is predicted that a new decline around May and June can be adjusted prices.
Yes and No.
Yes there are many other factor to include in computation when assessing impact on petrol station prices. Mainly taxes. Where I live those are more than 50% of the final price, hence the "industrial price of gasoline" has little effect on the final prices, as you said there are many more margins, costs, taxes and excises to be added. As @figmentofmyass mentioned in his post, most taxes are actually excises, so a fixed amount per liter, and their toll on final prices has grown dramatically lately.
Of course in many other world region the FX aspect of a devaluing currency can play a major role in that dynamic also, I have no direct experience of that being in the EUR area, but of course it is true for many regions.
The No part is regarding the industrial price itself. This is determined by some kind of "spot" (meaning "real time") price indicators. So the price at which the products are sold is always tied somehow to the current price of oil. There are many agencies to provide such indicators, one of the prominent being
Platts. The point is: what is real time? In the past two days the first WTI future was NOT included in this definition of price. So the fall in that particular instrument had NO IMPACT in the industrial price. This is something I already pointed out
here, a few post above in this very threrad.
There is simply too much OIL.
And too many non-OPEC producers (USA and Russia) are flooding the market with OIL.
OPEC is non anymore the powerhouse it used to be.
And also it's market share is a fraction of what it used to be years ago. Now the USA alone have a production roughly at 50% of OPEC volumes.
A few production cuts will be enacted from May 1st. Let's see how it plans out.
Regarding the negative prices the explanation is quite simple. And very much of a short term reasons.
There are several reasons for this.
First of all, the move is due to the future of May, which will stop trading tomorrow.
From Thursday the oil will trade at the June expiration and the price will return to being more "normal" level around 22 dollars.
As mentioned all oil related products (gas, heating oil etc) are already priced on Jun expiry.
But why May contract has dropped so much?
1. The WTI has a single delivery point in Cushing (OK). All the deposits in Cushing are full, so nobody wants to "buy" oil in that location, because the cost of storage is very high.So nobody want to buy May expiry.
2. There are many "financial speculators", that is, subjects who do not want/can in any case get physical oil delivered in Cushing. This causes the fact that these subjects must necessarily close the position before the expiry of the future and therefore are forced to "sell" the future forcibly. so something like a Long Squeeze.
3. Who are those longs? Apparently Oil ETF say the biggest inflows in history during last week., both in linear and in leveraged flavours. This caused a MASSIVE long positions in front months. So this answer the above: who needed to roll their position selling May futures to buy Jun?
4. The June expiration future has an greater open interest and much larger volumes, so this one is more difficult to move with "few volumes" and in fact has fallen much less.
Of course COVID-19 can be a perfect explanation for the "2020 leg" of the long trend graph you posted above.
Of course June expiry is going down the same path now, as the disruption continues.
As I said the world had never been so full of OIL lately. US has begun to literally crack Oil our of rocks, russians are desperate to sustain them self, on top of that OPEC is falling apart.
This is a secular trend.
On this secular trend added the Coronavirus.
Major oil consumers are lagging (transportation for obvious reasons are a missing buyers here- air lines in particular, but also industrial users or land transportation).
Many oil producers simply cannot turn the well out, as the costs will be massive, so they keep pumping oil and filling every hole on Earth. Deposits at Cushing, OK (delivery point of US WTI) are nearly full capacity, OIL tankers are full just anchoring idle outside ports everywhere.
So, this is the temporary trend.
On topo of those trends there was the last technical trend, the less relevant, but the most dramatic relating the May US WTI future Expiry.
Summing up in just two lines: everyone saw low petrol prices, so a lt of investors put money in OIL ETF's. Those ETF saw massive capital inflows in the last weeks. This caused some "smart" ETF manager to hedge themselves not only with JUNE, JUL and AUG contracts, but also with MAY Contracts, that were trading at huge discount (why pay more for the same product?).
Nearing future expiry they HAD to roll the expiry (they are banks after all, they cannot take the physical delivery), so they had to SELL the MAY expiry to buy the JUN expiry (or JULY, or AUG), whatever the price.
THIS sent the price negative to -40 USD.
