Paul's Insights: Crude awakening - negative oil prices don't mean free petrol
We’ve recently seen something that has never happened in most Australians’ lifetimes: The price of crude oil has fallen below zero.
At the start of 2020, crude oil was trading for around $US60 per barrel. In April it fell to negative $US35 per barrel.
Unfortunately, this doesn’t mean your local service station will be offering freebies on fuel.
What’s happened is that demand for oil has slumped as a result of the near-global shutdown. The problem is, oil isn’t one of those things you can just tuck away in the back of a warehouse. It needs specialist holding facilities. Right now, those facilities are crammed to capacity.
That’s why oil traders are paying someone else to collect their oil and deal with the problem of where to store the stuff – hence the negative price.
The sheer volume of oil sloshing around global markets should translate to lower prices at the bowser.
Our consumer watchdog, the ACCC, has warned petrol retailers to pass these savings on to motorists. Of course the downside is that during these ‘stay at home’ times, many of us can’t make the most of lower fuel prices.
The bigger issue is what it means for investors.
Let me start by saying that this isn’t the first time we’ve seen major drops in the price of oil. In 2014, for a variety of reasons, the price of oil dropped about 30% after four years of sitting around $US105 per barrel.
In addition, lower fuel costs tend to be a plus for economic recovery – and that’s good news for all of us.
Already, by the third week of April we saw the Aussie sharemarket bounce back 17.7% from its 23 March lows.
Investors who bailed out of the market in March cemented losses. Those who held firm have reaped the rewards of the upswing.
There are no guarantees we won’t see further dips. I don’t have a crystal ball, but history shows me that markets can go up when we least expect it, quite often in times of great challenge.
That’s why dollar cost averaging is a no-brainer right now.
Investing on a regular basis means you buy less when things are expensive and more when they are cheap. Yes, it takes discipline, but quality investments are only ever cheap in uncertain times.
Paul Clitheroe is Chairman of InvestSMART, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.