Investing

What the current plunge in oil prices means for you and your money

Twenty/20

Oil prices have been slumping in recent weeks as demand has collapsed as a result of the coronavirus pandemic. For the first time in history, prices even turned negative on Monday.

In theory, that means sellers would have to pay buyers to take a barrel of oil off their hands. There's an important distinction in terms of what this really means, however: The negative price was only for a futures contract for U.S. crude prices for May delivery, and that futures contract was set to expire just a day later.

A better indication of how Wall Street actually views the current price of oil, the futures contract for delivery in June, remains positive. Still, oil prices are experiencing an unprecedented sell-off because there's a glut of supply and very little demand. One of the primary benchmarks for crude oil has fallen nearly 80% so far this year.

"Quirks in the futures market created an artificial [negative] price that, while historic and capturing the extreme stress we're seeing in the oil market, was not quite the same as the actual price of oil," Ryan Detric, senior market strategist at LPL Research, wrote in a blog post. "Futures contracts were about to expire, oil is tough to sell and expensive to store right now." 

VIDEO4:2204:22
What are futures markets?

Video by David Fang

Still, the decline in oil prices does have a broader impact, including on the stock market, specific industries and regions of the country — and for you as a consumer. Here's what you need to know. 

Oil and stocks

While the drop in oil prices may be contributing to this week's decline in stock prices, it's more emblematic of the larger dynamic: The coronavirus pandemic will cause global economic growth to slow this year.

The global economy will this year likely suffer the worst financial crisis since the Great Depression, the International Monetary Fund said on April 14. And U.S. gross domestic product (GDP) is forecast to fall 5.9% in 2020.

Stay-at-home measures in place around the world have created less demand for oil. And even before shutdowns began, the price of oil was slumping because of a price war between the big oil-producing countries that had created an oversupply.

When there are big changes in oil prices, there's likely to be a similar move in the stock market. That's especially true if the cause of the move is a factor that affects both markets, like concerns about the pace of economic growth ahead.

Oil prices and your wallet

Generally speaking, lower oil prices are good for consumers because it will cost less to fill up your gas tank or to transport items you buy at the store, like groceries. That's assuming you don't work directly in the oil production industry or your livelihood is directly related to it.

"The winner is the average consumer" when oil prices go down, Scott Colbert, chief economist at Commerce Trust Company, told Grow last month. "And the losers are the energy companies, the drillers, the states that have oil reserves, and the banks funding it all."

Depending on where you live, your local economy could take a direct hit from the decline in oil prices. More than 22 million people have filed for unemployment claims in recent weeks, and experts expect job cuts in areas of the country that benefited from huge increases in production in recent years, like Texas, Oklahoma, and North Dakota.

On Tuesday, President Donald Trump ordered Energy Secretary Dan Brouillette and Treasury Secretary Steven Mnuchin to put together a plan to get funding to the struggling U.S. oil and gas industry. In a tweet, he said he wants to "make funds available so that these very important companies and jobs will be secured long into the future."

Longer term, experts expect that the price of oil will rebound once again. But for now, the tumble in this market reflects some of the bigger uncertainties created by the coronavirus outbreak. 

"Yesterday's price anomaly is another example of how efforts to contain the COVID-19 pandemic, even if necessary, are creating unprecedented shocks in the economy and financial markets," Detrick wrote.

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