Why 'negative' oil prices won't mean cheaper petrol at the pump in New Zealand

Despite oil price in the United States going "negative" today, Kiwis filling up their cars are unlikely to see cheaper fuel at the pump.

The negative price point came from a bizarre twist of the market, leading to producers effectively paying buyers to take their product away.

US crude oil futures sold for minus US$37.63 a barrel on Monday (US time) - the first time in history such a negative price had occurred, according to Reuters.

The price is for oil to be delivered next month, but according to Mark Stockdale, AA's PetrolWatch spokesperson, a drop in the price of crude oil does not necessarily lead to lower prices at the petrol pump here.

Only around one-eighth of the price paid for petrol by consumers at the pump equates to the commodity price, Stockdale told Newshub.

"This just shows how little the commodity price has to do with the retail price. So despite the commodity price being very low, the days of low pump prices are over."

What has a far greater impact on the price are costs such as taxes levied on petrol, he said.

"Commodity prices are the lowest they’ve been in a decade, but pump prices are higher today compared to 2009 because taxes have risen nearly 40c/litre since then (around 50c in Auckland)."

A spokesperson for Z Energy told Newshub that the negative price was for West Texas Intermediate (WTI), a grade of crude oil not used in New Zealand as a benchmark.

"We benchmark against Brent Crude," the spokesperson said. "Brent Crude prices have also been volatile – both up and down – throughout March and April, but only dropped by 8 percent overnight – or $2 per barrel - to land at $25 per barrel this morning."

The negative price was also more related to where the oil was being extracted from, the spokesperson explained. 

"The negative futures observed in the WTI are about crude oil being 'stuck' in a landlocked part of the United States, with nowhere to send or store it during a time of low demand. By comparison, Brent Crude is largely moved by ships and is still able to be moved around and stored. So, while the WTI prices may be remarkable in terms of historic precedent, they have absolutely no relevance to New Zealand."

Dr Ivan Diaz-Rainey, director of the Climate & Energy Finance Group at the University of Otago, says that the negative price point effectively means that suppliers are desperate to offload their product as they have nowhere to store it.

"Rather than people paying for your product, you're paying them to take it," Dr Diaz-Rainey told Newshub.

"Negative pricing is you've got a whole lot of barrel oil that you've got out of the ground and you've got more coming, you just need to shift it - so you pay for someone to take it."

The oil industry was going through "interesting times" at the moment, he said.

With thousands of planes grounded and people around the globe no longer commuting to work by car, COVID-19 has seen the world's demand for oil plummet. 

And while that certainly was a factor in the price going into negative figures, Dr Diaz-Rainey said the effects of the pandemic are coming at a time where the industry is already undergoing a fundamental shift.

"There is a crisis in the oil industry triggered by COVID but the underlying issues are energy transition and overcapacity in the industry globally. COVID has triggered an oil war where lower-cost producers (Saudi Arabia, Russia) are trying to drive out higher-cost producers, particularly in North America," Dr Diaz-Rainey said.

The oil price war has also flooded the market with cheap oil, leading to a drop in prices. 

And though a new deal brokered by the United States has led to many producers around the globe - including Saudi Arabia and Russia - cutting their outputs, there remains more supply than demand.

Despite the fact that negative prices in the US won't have a direct influence on the price Kiwis pay at the pump, the global situation is likely to mean lower prices in general for motorists down under.

"I think prices will remain low and it should have a beneficial effect on New Zealand, ultimately," said Dr Diaz-Rainey.

Contact Newshub with your story tips:
news@newshub.co.nz