US oil prices turn negative as demand dries up

https://www.bbc.com/news/business-52350082

by DarkContinent • 6 years ago

254 121 6 years ago

pcurve• 6 years ago

anybody know how many barrels were actually sold at that price? $0 is one thing, but I'm shocked at the minus $38. It could not have been large.

ochoseis• 6 years ago

“oil firms have resorted to renting tankers to store the surplus supply and that has forced the price of US oil into negative territory”

irrational2• 6 years ago

How long until we run out of tankers?

godzillabrennus• 6 years ago

No demand, surplus inventory already out there, so taking possession in May requires storing them indefinitely.

Investors decided to factor that cost in when buying these.

lubos• 6 years ago

You can close your position by buying the month after futures. This will require you to store crude oil for just one month. I think the issue is that storage facilities are almost booked out and the remaining capacity is just so expensive.

cheald• 6 years ago

You can look up the volume: https://www.marketwatch.com/investing/future/cl.1/charts -- between 2:20-2:25, EST, for example, volume was 748 contracts (748,000 barrels) at -$37.11.

jliptzin2• 6 years ago

Could be short covering

partiallypro• 6 years ago

It's entirely possible that no barrels will be effectively sold at a negative number. Because even after expiration you can negotiate OTC, it depends. At the very least, the final print likely will be renegotiated.

fennecfoxen5• 6 years ago

More specifically, West Texas Intermediate Crude futures for early May delivery are sub-zero. Late-May delivery is more expensive.

This is in part a reflection of the fact that the oil producers have already been paid for the output and are contractually obligated to deliver it, but no one actually really has a use for it once it is there, and it will cost money to transport or store it.

nshepperd• 6 years ago

It can't just be producers being contractually obligated to deliver it, can it? If that was the case, couldn't they close out their obligation by buying back some of these futures (at a profit), and "delivering" it to themselves by reducing production? So it must be that reducing production itself is not possible or too expensive for this to make sense.

new_time2• 6 years ago

Futures prices are significantly higher than $0. This is less noteworthy than it seems.

https://www.marketwatch.com/investing/future/crude%20oil%20-...

JshWright• 6 years ago

Just because the situation is complex doesn't mean it isn't newsworthy. This is certainly an unprecedented and significant event.

dmix• 6 years ago

It still appears more significant by the way futures trading works and the way it all bulked up to the last trading day, since there was no buyers after a certain point - because (certain) buyers were incentivized to wait until the last minute to submit orders, to get the cheapest price.

In a "real" market with physical oil wells + storage, wouldn't that decline in consumption -> storage normally happen far more gradually over time? (A drop over a week is less exciting than a down spike within 24hrs) I know it's less efficient that way and all of that, but this seems to make it appear like this drop in the market happened all at once.

A lot of non-experts will see the news this way regardless - it's slightly less exciting in context but still historic.

ycombobreaker3• 6 years ago

Futures prices were indeed negative, specifically the soon-to-expire May contract. June and beyond stayed positive, but this is the first time in history that the contract (any expiry) has traded at negative prices. This is a noteworthy event.

dchest• 6 years ago

Matt Levine's explainer https://www.bloomberg.com/opinion/articles/2020-04-20/there-...

propter_hoc• 6 years ago

So they start off the article with this statement:

"That means oil producers are paying buyers to take the commodity off their hands over fears that storage capacity could run out in May."

This statement is actually totally false. Producers already got paid for this production a long time ago when they initially sold the futures contract. What has actually happened is that as the expiry of the May futures contracts arrives, the traders who bought those contracts are now trying to unload them at all costs. This is because if they're stuck holding the contract at expiry, they have to take physical delivery (each futures contract represents 1000 barrels of oil), and the cost of storing that oil is getting really high since the storage facilities are nearly full.

Later they kind of explain this in the article:

"The severe drop on Monday was driven in part by a technicality of the global oil market. Oil is traded on its future price and May futures contracts are due to expire on Tuesday. Traders were keen to offload those holdings to avoid having to take delivery of the oil and incur storage costs."

But I think it's pretty irresponsible journalism to kick off the article the way they did, and imply that producers are paying you to take their oil today.

User233• 6 years ago

cost of storing that oil is getting really high

If anything, this is a wild understatement. Each contract represents 1000 barrels of toxic waste. You can't just have that stored in a shed or something. And all the commercial regulation compliant storage is gone. I'd be willing to bet you will have a hard time even finding a tanker truck to take it to a buyer, since the tanker owners themselves are going to be using those trailers as temporary storage facilities. Anyone stuck taking delivery of barrels right now is in for a world of hurt. The legal fees alone are going to be ruinous.

jliptzin2• 6 years ago

Forgive me if this is a stupid question but they can’t hold a gun to your head to force you to take the oil, right? Can’t you just refuse the delivery if you have nowhere to store it? Is there language in the contract for this kind of situation?

ClumsyPilot• 6 years ago

This is a very good point - unlike tree logs or something, you can't just pile up oil.

I dont even think youd be allowed to burn unrefined oil in mass.s

RobLach• 6 years ago

In the USA at least, EPA enforcement has been drastically relaxed to allow a bit more freedom in regard to this issue in exchange of public safety and environmental stability.

I wouldn't be surprised if someone doesn't see the opportunity to just dump oil from their tankers to take on an additional lucrative storage contract from a speculator caught off guard.

ELPC just released this report for example claiming the number of facilities regulated by the EPA that are out of compliance have doubled in the last year.

http://elpc.org/wp-content/uploads/2020/04/Region5Report_FIN...

gwbas1c• 6 years ago

since the tanker owners themselves are going to be using those trailers as temporary storage facilities.

Can the tanker just take the oil it's holding to the buyer, then replace it at profit?

Example:

Tanker is paid to hold Joe's oil

Bob needs a tanker to bring oil to Matt.

Tanker brings Joe's oil to Matt, and replaces the oil at a profit.

PierceJoy• 6 years ago

But does this mean that the contract holder is paying someone to take their oil in the future? It feels significant that someone in the chain from producer to consumer is now paying to have someone take their product.

mike_d2• 6 years ago

Producers already got paid for this production a long time ago

Nothing requires a broker to be involved. Drillers can sell futures to "get paid now" for future production, and likely did so to cover expenses in these chaotic times.

If they issued a contract for 1000 barrels on the 1st of the month, produced that 1000 barrels on the 10th, and have an unsold contract on the last day of the month - they are screwed.

foota• 6 years ago

I'm confused, isn't issuing a contract bearish? They would be able to make a large profit but closing their position, wouldn't they?

scarmig• 6 years ago

It reminds me of a funny story in Options, Futures, and Other Derivatives, where some newbie trader mistakenly bought a contract on live cattle futures to close out a long position. The trader spent a couple weeks traveling thousands of miles and figuring out housing and food for hundreds of cattle until a buyer for them could be found.

9nGQluzmnq3M• 6 years ago

There's another version of this involving a whole lotta coal:

https://thedailywtf.com/articles/special-delivery

EGreg• 6 years ago

Well to be honest, although it may not be true for oil, it can definitely be true briefly for electricity, because it’s use it or lose it. Battery storage is still in its infancy.

Negative prices are definitely a thing when you can’t stop production and all of a sudden storage or middlemen are over capacity.

LOOK AT WHAT IS HAPPENING right now in the US food chain! The farmers have to euthanize cattle rather than sell them because the price they get is lower than upkeep. Yet the price of meat at the supermarket is going up and up. What’s going on? Well, the processing plants have shut because they’re sending employees home if anyone is infected, and so the capacity of the middlemen drops. And boom, there is a huge inefficiency now.

Someone in congress is working on a bill to let the farmers and supermarkets disintermediate... as usual, decentralization to the rescue.

Waterluvian• 6 years ago

What happens if you just literally don't come pick up your oil? Lawsuit?

csomar• 6 years ago

Producers already got paid for this production a long time ago

It's a future market for the public. You don't know which side you are trading with (trader or producer) but they are all trading at all times even if they are not transacting.

Here is an example: Let's say you are a producer that a sold a future contract a long time ago at $25. You have the opportunity to buy that contract again today at -25$ and close your position. You have no oil to deliver + you made $50 per barrel more than what oil is trading at in Europe.

Given that we can conclude:

- Big producers are refusing the close positions to keep prices down. (or maybe they have a legitimate reason why they want to deliver their contracts?)

- The market temporarily dipped because of leveraged trading. Traders were a sleep/slow to react. (they don't have automated bots?)

- This price range (maybe not -25$ but maybe $5-0) is the real price of oil for these few days.

ThrustVectoring3• 6 years ago

Big producers are refusing the close positions to keep prices down. (or maybe they have a legitimate reason why they want to deliver their contracts?)

They have legitimate reasons why they want to deliver their contracts. Crude oil is highly toxic, they only have so much storage available, and shutting down wells incurs significant costs. If they don't buy back their short futures position at -$25/barrel, that means shutting down costs them at least $25 per barrel no-longer-produced.

rco8786• 6 years ago

How is this not a good time to buy oil. Assuming a 5+ year time horizon.

lumost• 6 years ago

It's a physical asset, with strict environmentally regulated storage requirements. Holding it speculatively for 5+ years requires that the speculation will pay in excess of the storage fees compounded at a reasonable risk adjusted rate of return for the 5 year duration.

This is a great deal if you happen to own cheap oil storage, I wouldn't be surprised if the main buyers of these contracts are the storage companies.

Vomzor• 6 years ago

How long would it take to build new storage tanks?

fennecfoxen5• 6 years ago

With regulatory approvals? Probably years.

The smart equivalent is to get a tanker ship and just float it out at sea until someone wants the oil (usually just west of Africa, where you can easily dispatch it to whoever ends up needing it.) Not sure if it works quite as well with WTI instead of Brent crude, though.

core-questions• 6 years ago

It is probably a fair and terrible assumption that others have thought of this already and that, in fact, tanker ships are filling up all over the place right now. Statistically, this means we're more likely for a spill, somewhere.

kyleblarson• 6 years ago

The cost of supertankers used for offshore storage has unsurprisingly also gone through the roof. Well over 100k USD per day.

nerfhammer• 6 years ago

They're already doing this & running out of capacity

https://www.forbes.com/sites/gauravsharma/2020/03/12/superta...

maxehnert• 6 years ago

Since oil is making the front page here, if you're interested in the history of American oil industry, "The History of the Standard Oil Company" by Ida Tarbell is a fantastic read. It's also a great example of investigative journalism.

In early chapters of the book she covers the initial rush to pump oil in the Oil Regions and the history of pipelines and storage facilities as it all ties into business practices of Rockefeller.

Oil storage facilities were an interesting startup idea back then, in the beginning producers would pump the oil into open pits where it would seep back into the ground if it wasn't transferred fast enough, then of course new ways of storing and transporting the oil were experimented with. It also goes into how much supply/demand were at odds in the beginning leading to several collapses in the price of oil when there wasn't such a diverse market. Again some of the issues we still see where land locked areas of producers struggled to get their product out of the region and how local economies caused drastic prices differences that we're seeing right now.

https://en.wikipedia.org/wiki/The_History_of_the_Standard_Oi...

CPLX• 6 years ago

Also recommend "The Prize" which is incredible.

mistrial9• 6 years ago

recommend -- The Taking of Getty Oil by Steve Coll; written in a readable way, many situational details

new_time2• 6 years ago

Ida Tarbell's father was an oilman who was ruined by Rockefeller and Standard Oil while she was a girl, which is important to keep in mind when contextualizing her work. She lived her life in part as a crusade against Standard Oil and Rockefeller. Obviously she was heavily biased, this being instilled in her early on.

For a less biased look at the history of the American oil industry by way of Rockefeller and Standard Oil, I strongly recommend Titan by Ron Chernow - author of Hamilton - which is an excellent account of Rockefeller and Standard Oil, both the good and the bad.

dntbnmpls• 6 years ago

dupe.

https://news.ycombinator.com/item?id=22923025

saadalem• 6 years ago

Oil costs $ to store. Due to the economic collapse, oil isn't being used much. So all the storage facilities are filled up. So nobody who can store it will buy it from you. If you want to get rid of oil, you have to pay someone.

zw123456• 6 years ago

Could you just take it and they pay you to take it and dump it into dry wells in Texas and Oklahoma, seems like a reasonable gamble ?

Shrug....

comicjk• 6 years ago

Oil deposits are permeable rock with a mix of oil and water in the pores. Pumping oil down into such a formation would be slow and expensive. It would also take different equipment from that which is there at the wellheads now, so you couldn't get started right away.

perl4ever• 6 years ago

In one of the articles, it quoted someone from, I think, the CME, that said they were fully prepared in their trading systems to handle these negative prices with no hiccups.

What I immediately thought, that I haven't seen anyone else mention yet, is that there are some admirable programmers!

vkou3• 6 years ago

As someone who worked on trading software, I'd reserve the praise for the PMs - who would explain to the programmers why all this stuff is important.

jhwang5• 6 years ago

Ex-trader at GS/MS here. PMs in this case are traders, requirements about trading systems come from traders b/c they have to dog-food it. Usually there is no separate PM in the tech world sense at banks, though there are project managers.

ycombobreaker3• 6 years ago

Any futures market provides calendar spreads as well, which represent a price differential between two dates (think: CLK0 is the May contract, CLMO is the June contract, and CLK0-CLM0 is the difference between the two). CME's systems should trivially handle negative prices because they already have spreads, which are frequently negative.

mensetmanusman2• 6 years ago

It’s getting more likely that the fallout from the response will be worse than the virus would have been.

For perspective, 800 000 people die every year in the world from suicide alone.

Depression/anxiety/hopelessness has real consequences.

fiblye• 6 years ago

On the other hand, there’s some potential good that could come of it. Some people who’ve felt trapped in dead end jobs are getting new opportunities. Who knows if the good changes that result will outweigh the bad, though.

mensetmanusman2• 6 years ago

True, it was cool to see how much solar production has spiked in Germany because of smog reduction.

throw_m239339• 6 years ago

Yes it will, this thing is far from over. It will have huge consequences on civilization as we know it. It also demonstrated how weak all our economic systems are.

myth_buster• 6 years ago

Relevant: That Time I Tried to Buy an Actual Barrel of Crude Oil

https://www.bloomberg.com/news/articles/2015-11-03/that-time...

aazaa• 6 years ago

Although this is largely a paper phenomenon, the thing to pay attention to now is ripple effects.

A few weeks ago, Capital One was granted a regulatory waiver from the CFTC over its oil derivatives positions - a waiver it since declined to use:

The registration is related to Capital One’s commercial lending to the oil and gas industry, a relatively small part of its overall business. The bank enters into commodity swaps with energy clients to help them mitigate the risk of energy price swings and the related borrowing risks.

https://www.reuters.com/article/us-health-coronavirus-capita...

Most people don't immediately think of Cap One as an oil futures player. But its lending business caused it to enter the market to hedge some of its loan portfolio.

Given the highly unusual nature of what happened today, it wouldn't be surprising to see future announcements of banks or other financial institutions getting into trouble over commodities derivatives bets going pear-shaped.

csense• 6 years ago

If you owned an oil ship, what stops you from getting paid $25 a barrel to fill your ship up with oil, sailing to international waters, dumping it all in the sea, then go right back to port and do it again and again getting paid $25 a barrel each time?

bouncycastle2• 6 years ago

These are only the prices of the "futures contracts". i.e. oil that hasn't been produced yet, as far as I understand. Actual physical oil still has a price > 0. (Spot price)

Here is a page that includes some spot prices https://oilprice.com/oil-price-charts

bradjohnson• 6 years ago

What would stop you from doing that with any unwanted garbage?

NamTaf• 6 years ago

Probably various international treaties signed by the nation under which you're flagged.

talentedcoin• 6 years ago

There seems to be lots of confusion on how this could have happened. Long story short — it may be because of the USO ETF:

https://www.forbes.com/sites/jimcollins/2020/04/20/the-us-oi...

S_A_P• 6 years ago

There should be a meme: 75 year old baby boomer: I remember when gas was less than a dollar a gallon 45 year old son: me too! 15 year old grandson: me three!!

anonu• 6 years ago

It should really be "US WTI front month futures negative for the first time"

There's a big distinction between that and "oil prices"

xyst• 6 years ago

I might be in minority, but I think this is great for the clean energy sector and environment. The oil is not being used and thus not being consumed and converted into toxic products (carbon dioxide, and various other vehicle emissions) which are leaked into the environment.

I hope these oil companies dissolve over this unprecedented event.

toomuchtodo• 6 years ago

Lots of silver linings from COVID (oil demand destruction, air pollution reduction, natural work from home experiment at scale).

generalpass• 6 years ago

So, where are all the arguments now about why speculators should be required take delivery? I mean, really, the oil producers got paid and consumers shall have copious supplies of oil.

Nobody out looking to find excuses to further regulate commodities markets when all the traders are losing their asses.

US oil prices turn negative as demand dries up

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