What Do Negative Oil Prices Mean?

Arrow Symbol, Chart, Deterioration, Graph

(Image credit: Getty Images)

published 28 April 2020

Ryan Ermey: Earlier this week, U.S. oil prices went negative, with traders paying folks to take barrels off their hands. S&P Global Platts is a go-to analytics firm for energy and commodities. Their lead quantitative analyst Vito Turrito joins the show to make sense of all of this in our main segment. On today's show, Sandy and I give an update on stimulus checks. And, a new edition of Financial Fact or Fiction features unemployment benefits and private student loans. That's all ahead on this episode of Your Money's Worth. Stick around.

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Sandy Block: What I think has made things even worse is that the IRS actually launched a tool on its website -- a Get My Payment tool -- where people can go and see where their payment is. Millions of people did that, and they got a message that said "Payment status not available." That made them even madder, because you're telling people here's a tool where you can find out where your payment is and then you use it and it says, "Oh, nevermind." There's a lot of confusion about this.

Sandy Block: In all seriousness, as we've said before, the stimulus is $1,200 per person. If you have kids 16 and under, you get $500 a kid. A lot of people really need this money and are wondering why they didn't get it. There are a few reasons and we'll put in the show notes. We've got a lot of good stuff on our website about this. But, I think one of the main reasons, if I had to guess, is this: The stimulus is going to be based on your 2019 return. If you haven't filed a 2019 return, it will be based on your 2018 tax return. But, if you filed your 2019 return and the IRS is processing it, you may get the payment status not available, you're in limbo there. They're not going to use your 2018 return because they have your 2019 return, but they're not done with it yet. I think that's probably a big reason that a lot of people are getting this message.

Sandy Block: A couple of other reasons. There was a big to-do over what to do about people who don't have to file taxes and that includes a lot of Social Security beneficiaries. Other people who may not have a tax return for legitimate reasons, the IRS created a non-filers, enter payment info here tool, but if you've used that to tell the IRS that you're eligible, they may not have processed that yet. Well, two other things. If you receive Social Security benefits, or Veteran's Administration benefits, you will automatically get a payment, but again, it may be in processing. So, you're going to get paid, but you're not going to get paid yet. The final reason is that you made too much money. Again, the stimulus payments are based on your taxable income in either 2018 or 2019. There is a cutoff, it phases out, so it may be that you made too much money to get a check, or a reduced amount.

Sandy Block: I'm sorry. I want to add one more reason, because this would apply to the young people in our audience. You may not get a payment, because you are eligible to be a dependent on someone else's tax return. That's mainly going to apply to 17- and 18-year-old kids, teenagers who are still living at home or college students up to, I think, age 23. If you can be claimed as a dependent on your parents' tax return, even if you're not necessarily being claimed as a dependent, you're probably not going to get a check.

Ryan Ermey: The first time I logged on, they didn't have any of my bank account information, so I had to enter in my bank account number, my routing number, and the amount of money that I owed the IRS, so not my state refund. I didn't have to enter my net refund, because that got kicked back to me as it didn't match our records. I entered in the amount of money that I paid to the IRS, and they said, "Okay great, we have your information now."

Sandy Block: That's another problem that some people may have changed the bank account that they used since they had direct deposit. The IRS is using the direct deposit information it has on hand for you. You might have changed since you filed your tax return, if you had direct deposit when you filed your tax return. That's a really good advice, to make sure that the IRS actually has what it needs to send you your money.

Ryan Ermey: Quick note before we get started with the interview here, folks. Vito is going to mention WTI and Brent a few times in this interview. Those refer to the two main benchmarks for crude oil prices, the West Texas Intermediate, here in the U.S., that's the one that went negative, and Brent Crude, which is a global benchmark. So, if you hear one of those, that's what he's talking about. Now, enjoy the interview.

Vito Turrito: The main reason oil prices fell so aggressively is storage. Storage is nearly full across the globe, basically. There is also another reason why we had such violent selling pressure in the market, and that is merely a technicality based on the fact that WTI Futures that fell, and went below zero, was the main contract. When it went below zero, when prices went negative, that was the last day of that contract.

Sandy Block: Vito, this just really amazes me, because I'm old enough to remember when oil was actually rationed . . . when people had to stand in line to get gas. There was all this talk about peak oil and how we were going to run out. Now, what you're talking about is basically a glut of oil. What are governments and oil companies doing, to try and reduce the glut? Will we see an impact of that?

Vito Turrito: But at the moment, this is the situation. The only thing that we know right now is that demand is down because of the coronavirus pandemic. So the massive, widespread lockdown situation that we have right now in the planet is unprecedented. Right now, we have three billion people under lockdown across the globe and this is basically causing a massive drop in demand. Companies, whether they want it or not, probably they will start to reduce the production, first of all, because demand is down. But right now, the problem is that they don't even know where to put oil, where to store it.

Ryan Ermey: You say we have this humongous glut because we're in this unprecedented lockdown. Eventually, things are going to start getting back to normal, countries' economies are going to start opening back up. When that happens, will oil prices and this volatility that we're seeing, will that normalize, too? Or, will this prolonged lack of demand have lasting effects in the economy, and will we have a worse economic downturn that people are thinking right now?

Vito Turrito: We see, definitely, a recovery in price. However, things are going to get worse before they get better. Now we are in April, and right now, as we speak, we have the Brent Futures, which are trading at $22.27. I'm talking about the June contract, the front month. Whereas WTI Futures are trading at $17.39, okay? However, what we have right now in the market is a massive . . . that means that the market is flooded with oil, there is massive . . . right now, it's not just about the problem with the supply, right now global oil. When I say oil, I mean both TI and Brent, oil is stuck between two different shocks. One happening on the demand side and the other one happening on the supply side.

Vito Turrito: However, at the moment what we see is a price that is going to probably stay low for a while. May, probably, is going to be the worst month of the year, with prices averaging . . . we see pricing averaging $9 for WTI and $12 for Brent, when it comes to May. Then, eventually . . . hopefully, May is going to be the worst. Then from June we will see a gradual, slow and painful recovery, until December 2020.

Vito Turrito: Also, because you have to take into account that oil is pretty much a macro economic indicator by itself. Now it's oil, maybe in the future it will be electricity, hydrogen, whatever that is. Back in the day, it used to be coal, or steam, or whatever that was, the main commodity back in the day. Whatever is the main commodity in the specific timeframe doesn't really matter. The thing is that that commodity is going to play a massive role, as far as the global macroeconomic scenario is concerned.

Vito Turrito: The fact that oil prices are so low is a big wake up call for all the rest of the planet when it comes to financial markets, when it comes to the S&P 500, when it comes to the Dow Jones. All those industries have gone up over the last several weeks, because of federal Reserve, because of the European Central Banks, because of the big bailout funds that have been announced by the U.S. government, by Germany, by Italy, by the U.K., by all the other massive commodities. The problem is that despite all this expansive monetary policies, the International Monetary Fund still, to this day, forecasts a global growth which is going to be minus 3%, in 2020.

Vito Turrito: Partially. Jet fuel and gasoline have been the petroleum products that have been hit the most by this crisis, for obvious reasons. I mean, we mentioned that before, the transportation is down, airplanes are not flying, cars are not circulating, so everything is going to be down. But, jet fuel demand is forecast to drop by 50% between March and May this year, but should go up by year end. The same thing is going to happen to gasoline. Gasoline demand will probably drop by 20% between March and May.

Vito Turrito: The same thing's going to happen for gasoline prices. They will probably drop a lot more in May, they will probably stay low in June, but they will tend to recover by year end. Hopefully, also, if we're going to have an increase in gasoline prices, if the . . . lockdown period goes over. Once that is over, probably by December, Christmas period, it's going to be holiday season, so people will start driving again, and will start buying air tickets again. Jet fuel and gasoline prices will recover by year end.

Sandy Block: Well Ryan, I thought that was a fact because I certainly know, and I've warned people before, and I will warn them again, that your unemployment benefits are subject to federal taxes. I've known in the past that people have been on unemployment briefly, gone back to work, and been shocked when they filed their taxes the next year, that those benefits were taxable. Is that not a fact, Ryan?

Ryan Ermey: If you live in . . . I'm going to try to do this in one breath, Sandy. Are you ready? If you live in Alabama, Alaska, California, Florida, Montana, Nevada, New Hampshire, New Jersey, Pennsylvania, South Dakota, Tennessee, Texas, Virginia, Washington state, or Wyoming . . . no sweat, I used to play trumpet . . . you won't pay state income tax on your unemployment benefits. But, as you know, and as I just noted, you will be paying federal tax.

Ryan Ermey: Obviously, quite a lot more people than usual are applying for unemployment benefits right now, and it's really this whole rat's nest to navigate. Our colleague Marc Wojno has an excellent story on Kiplinger.com about applying for unemployment, that we will be putting in the show notes. But, one thing from the story I do want to point out is CareerOneStop.org is really an excellent resource for anyone who needs to file for unemployment. It's just a one-stop shop to check your eligibility, and find the right avenues for filing a claim in your state.

Sandy Block: You can actually have taxes withheld from your unemployment benefits. I doubt very many people are going to do that now because that's not bad idea if you think you're only going to be out of work for a little while. But, given the situation we're in, our recession, the great uncertainty about when people are going back to work, I suspect most people are going to want to get their full check. The other thing I suspect is if this drags on as long as we think it will, I don't know that taxes are going to be a huge problem for a lot of people because the lower your income, the lower your taxes.

Sandy Block: Well, actually it's a fact. This just happened and we're working on a story about this now for our upcoming issue. Private loans were not included in the stimulus package, which did include a lot of relief provisions for federal student loans. But, recently more than a dozen states have reached an agreement with private lenders to offer some relief to these borrowers as well. I would say, it's not as good as what the federal student loan borrowers are getting, but it includes a minimum of 90 days of forbearance on payments. So at least a few months where you won't have to make payments. I suspect, it doesn't say here, that interest will accrue. But, they also will waive late fees, seize debt collection lawsuits for 90 days and other things.

Ryan Ermey: Yeah. Any time you say that something is to the discretion of the lender, it means that you're going to have to advocate for yourself a little bit. But, in this case, absolutely worth it. It's been a huge relief for me, especially since . . . you'll see how the sausage is made here a little bit. Monthly magazine, you get paid once-a-month and having that student loan not just come immediately out of my paycheck has been a huge relief and allowed me to have some extra cashflow, which is nice. As you say, absolutely worth negotiating, if you can.

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Block joined Kiplinger in June 2012 from USA Today, where she was a reporter and personal finance columnist for more than 15 years. Prior to that, she worked for the Akron Beacon-Journal and Dow Jones Newswires. In 1993, she was a Knight-Bagehot fellow in economics and business journalism at the Columbia University Graduate School of Journalism. She has a BA in communications from Bethany College in Bethany, W.Va.