Oil trades in negative zone, how does it impact prices across the globe?

The coronavirus has brought a lot of firstsbut none as stark and shocking as oil trading in the negative zone.

What does that even mean?

Traders paying buyers to take the oil off their hands. So the consumers get both the oil and the cash.

This should sound good but it isn't. This has happened for the first time in history. This story is about the US oil benchmark.

This is a bit technical but let's simplify it and break it down to four questions and answers.

Why did the oil prices crash?

Monday, was a really bad day for the oil markets. The price of one barrel of oil hit about 20 dollars. That's about 1,600 rupees. One barrel has 159 litres.

So it can be said oil prices fell to 10 rupees a litre. But, the benchmark for US oil witnessed something unheard of. The benchmark is called West Texas intermediate.

Here the oil prices fell into the negative and that's where it stayed. Oil ended the day around $30 below zero. Now, this benchmark-- is a point of reference for American traders. An indicator for oil prices in America.

On Monday, traders looked at it with horror. The graph fell below zero. Traders were stuck with barrels of oil. And nobody to buy it.

Oil used to be considered gold right now it is worthless.

Why is this happening? Why are global oil prices falling?

There are a couple of reasons.

One:The demand has dropped. The world is in lockdown mode. People are at home. Not driving, not flying. Factories are shut. So there's no demand.

Two: The battle between Saudi Arabia and Russia over oil prices. They reached a truce. But it came too late. They agreed to cut production a few days back.

But before their agreement, companies kept pumping the market with oil.

Now, there is a demand-supply mismatch. Oil kept coming, but it wasn't being used.

The result is this-- the world has more oil than it needs.So, the prices have collapsed.So the oil prices are falling.

US Traders are paying people to buy oil.

Does this mean you get paid to fill up your tank?

The answer is no. That's not how it works. The price of crude oil has dropped. That does not mean a fall in retail prices.

The crude fall

The fall was in something called the futures contract. It is an agreement to buy or sell something at a future date. And, the drop in America does not affect prices in India.

India imports the Brent crude. Its price is low but stable. But, that does not mean the prices in India can't drop.

What does the price drop mean for India?

Its good news. But not necessarily for you and me. India can import oil for cheap. The government can consider stocking up the reserves. But, the retail prices may not see a major drop.

Two factors decide the prices of oil in India.

The price of the rupee against the dollar and the 15-day average prices. The rupee has fallen to record lows against the dollar. One dollar costs around 77 rupees.

So, importing the oil will cost more.Here is how the world should look at the situation for oil.

For importers, more oil is available for cheap. They can buy more at throwaway prices.But this price fall is bad for business. Exporters will struggle.

In America, if the prices fall more --- businesses could shut, people could lose jobs.

Major exporters like Saudi Arabia might be able to manage the shock. Russia is feeling the pinch of this drop already. The rubble is losing its value and the situation might not improve anytime soon.