21 votes

Oil plunges below $5 with traders fleeing expiring contract

23 comments

  1. [2]
    Pistos
    Link
    Related: https://edition.cnn.com/2020/04/20/business/oil-price-crash-bankruptcy/index.html
    9 votes
    1. [2]
      Comment deleted by author
      Link Parent
      1. dubteedub
        Link Parent
        I would be surprised if Trump did not attempt to bail them out. Apparently the Department of Energy is already considering paying oil companies to keep oil in the ground. U.S. Weighs Paying...

        I would be surprised if Trump did not attempt to bail them out.

        Apparently the Department of Energy is already considering paying oil companies to keep oil in the ground.

        The Energy Department has drafted a plan to compensate companies for sitting on as much as 365 million barrels worth of oil reserves by effectively making that untapped crude part of the U.S. government’s emergency stockpile, said senior administration officials, who asked not to be identified describing deliberations prior to a decision and announcement.

        Federal law already gives the Energy Department authority to set aside as much as 1 billion barrels of oil for emergencies -- without dictating where they should go. That creates a legal opening for storing crude outside the government’s existing reserve and even blocking its extraction in the first place. In this case, the government would essentially buy the oil locked underground but ask producers to hold off on extracting or delivering it.

        The keep-it-in-the-ground plan would require billions of dollars in appropriations from Congress -- and the administration just recently lost a bid in Congress to spend $3 billion buying oil for the government’s strategic reserve. A deal like this could be unprecedented and reflects a Trump administration push to help domestic drillers battered by a surge of oil production and a collapse of demand tied to the coronavirus.

        2 votes
  2. [12]
    Turtle
    Link
    Is this a typo or was the value actually negative? How does that even work?

    In New York, West Texas Intermediate for May delivery dropped as low as -$1.98 a barrel.

    Is this a typo or was the value actually negative? How does that even work?

    3 votes
    1. [10]
      stu2b50
      Link Parent
      Basically full storage, shutting down production is a huge long-term cost, so right now people are PAYING people for storage space, basically. Or rather, you can think of it as the cost storage...

      Basically full storage, shutting down production is a huge long-term cost, so right now people are PAYING people for storage space, basically.

      Or rather, you can think of it as the cost storage being higher than the cost of oil.

      11 votes
      1. [9]
        skybrian
        (edited )
        Link Parent
        From further reading it seems to be a financial thing. Apparently a lot of oil is sold in advance on the futures market. The oil has already been paid for, but who gets it is not yet determined,...

        From further reading it seems to be a financial thing. Apparently a lot of oil is sold in advance on the futures market. The oil has already been paid for, but who gets it is not yet determined, because the future can be resold before delivery.

        So, people buy futures for resale. They don't want the oil, they just want to bet on it. And now they are desperate to find someone else to take it because they don't want it delivered to them.

        It seems like, physically, if it's in an oil tanker for example, someone could hire the ship to keep it where it is until there is somewhere for it to go. But that costs money. If you own oil and don't resell it, you have to pay the oil's rent.

        That's the May futures market, which expired today. The June futures market is at $20.

        I guess I'm not too worried about financial middlemen getting caught out. It's not like there is physical damage.

        10 votes
        1. [3]
          dubteedub
          (edited )
          Link Parent
          Funnily enough, the youth climate activist organization the Sunrise Movement who recently announced that they would not be endorsing Joe Biden, thinks that buying oil futures means they can...

          Funnily enough, the youth climate activist organization the Sunrise Movement who recently announced that they would not be endorsing Joe Biden, thinks that buying oil futures means they can somehow publicly own oil and gas companies.

          An hour after this was reported, prices are down to almost -$40 a barrel.
          This is our chance to publicly own oil & gas companies.
          If we do this we can protect workers in these industries while also working to manage the transition off of fossil fuels.

          https://twitter.com/sunrisemvmt/status/1252317855321862153

          4 votes
          1. [2]
            Comment deleted by author
            Link Parent
            1. dubteedub
              Link Parent
              Just to add, the twitter user's profile states that they are a member of the DC chapter of the Sunrise Movement, as well as the DC chapter of the Democratic Socialists of America. The user is a...

              they're responding to a tweet by Twitter user jaymac1893 that reads as follows:

              Just to add, the twitter user's profile states that they are a member of the DC chapter of the Sunrise Movement, as well as the DC chapter of the Democratic Socialists of America. The user is a climate / political activist, not an expert in oil and gas.

              what the tweet is saying is that now, when the fossil fuel companies are at their weakest (indicated by the negative price of oil futures), is the opportune time to nationalize them and begin the transition to clean energy, because they won't be able to put up a fight.

              Even if that is your interpretation of the tweet, it still does not make any sense.

              The largest US oil and gas companies are Exxon Mobil, Chevron, Valero, and Phillips.

              The market caps for those companies, meaning their value currently on the stock market are respectively $174 billion, $156 billion, $20 billion, and $25 billion. That is even with the huge drops those companies have seen in their stock price over the last year.

              It is not like these companies worthless right now because they are paying other businesses for one month of oil futures.

              And do you really think these companies are not going to put up a fight if we try to nationalize them?

              Also, who do you think runs the government right now? Do you really want Trump and the GOP to own the country's oil and gas production?

              None of this makes any sense.

              1 vote
          2. skybrian
            Link Parent
            This is why curiosity is important.

            This is why curiosity is important.

            2 votes
        2. [5]
          AugustusFerdinand
          Link Parent
          The issue is that this oil isn't in a tanker it's in a pipe on it's way to Cushing, OK where storage is already full. Last time I checked there are no ports in Oklahoma that a tanker can dock to....

          It seems like, physically, if it's in an oil tanker for example, someone could hire the ship to keep it where it is until there is somewhere for it to go. But that costs money. If you own oil and don't resell it, you have to pay the oil's rent.

          The issue is that this oil isn't in a tanker it's in a pipe on it's way to Cushing, OK where storage is already full. Last time I checked there are no ports in Oklahoma that a tanker can dock to. This was seen coming as early as a month ago as the tanker storage stocks have been going up steeply and spiked a couple of weeks ago as they filled up too. There's no where to store it, there's no where to send it, and unlike a lot of futures oil is a physical delivery future, so it can't just be rolled over to the next month as easily.

          They bought the future, they can't take delivery, so they tried to offload it to someone that is willing to take the hit as the market is saying that it's going to cost $40 per barrel just to deal with it, so that's what they're paying people to do. If they don't, they breach contract.

          1. [4]
            skybrian
            Link Parent
            I have basic questions about how delivery actually works for oil futures. I read a comment somewhere where the oil is in a storage tank and delivery just means the paperwork to take ownership, so...

            I have basic questions about how delivery actually works for oil futures. I read a comment somewhere where the oil is in a storage tank and delivery just means the paperwork to take ownership, so now you're on the hook to pay the lease. But I don't know if they were just guessing. I guess it must depend on the market?

            Also, why are oil futures monthly? It seems like delivery needs to be happening all month.

            Maybe @Loire would know.

            1 vote
            1. [2]
              AugustusFerdinand
              Link Parent
              The paperwork determines who owns it, but the oil is a "future" because you don't get it when you order it, but when it's delivered. The contracts for it expire today, but delivery is next month....

              I read a comment somewhere where the oil is in a storage tank and delivery just means the paperwork to take ownership, so now you're on the hook to pay the lease. But I don't know if they were just guessing. I guess it must depend on the market?

              The paperwork determines who owns it, but the oil is a "future" because you don't get it when you order it, but when it's delivered. The contracts for it expire today, but delivery is next month. It dropped to negative because when it's delivered next month the storage is expected to be full. It's like showing up to the hotel on the Thursday before a big convention and expecting to get a room. They're all full, no one is checking out, everyone else already paid for their room, and they're not booting anyone out to make room for you.

              Also, why are oil futures monthly? It seems like delivery needs to be happening all month.

              Delivery does happen all month (known as dates of acceptable delivery), there's just a contract date/deadline when you had to sell the future or it's your oil. Some places turn oil into gasoline and other products, those people want delivery, investment firms do not. The contract expires today for oil to be delivered in May. Not all futures work this way, many can be rolled over to future months, but oil is a delivery settlement future instead of a cash settlement.

              Back to delivery happening all month, for WTI (the negative oil in question) when they bought the futures contract they agreed to the delivery terms:

              (A) Delivery shall take place no earlier than the first calendar day of the delivery month and no later than the last calendar day of the delivery month.

              (B) It is the short's obligation to ensure that its crude oil receipts, including each specific foreign crude oil stream, if applicable, are available to begin flowing ratably in Cushing, Oklahoma by the first day of the delivery month, in accord with generally accepted pipeline scheduling practices.

              The oil can and (normally) will be delivered in May, per item (A), but can arrive any time during that month. The contract states, per item (B), that it is the purchaser's responsibility to make sure there is somewhere for that oil to go beginning May 1. Since there will be some point during May that there will be no room for the oil and they can't just keep pumping it to overflowing the oil drillers will have to stop drilling/pumping and likely cap their wells thereby not delivering what the investors said they'd take. This is expensive, it is also a breach of contract to not take delivery. So the oil companies are going to sue those that have those contracts for every gallon not taken, plus damages.

              The investors played the game, they lost, they get to pay for it. Now where did I leave that tiny violin?

              3 votes
              1. envy
                Link Parent
                A lot of heavy oil consumers like airlines and cruise lines buy futures contracts to lock in oil prices. I wonder if any ETFs got forced to shut down.

                A lot of heavy oil consumers like airlines and cruise lines buy futures contracts to lock in oil prices.

                I wonder if any ETFs got forced to shut down.

                1 vote
            2. skybrian
              Link Parent
              I found an explanation. I guess it's all about storage tanks in Cushing, Oklahoma.

              I found an explanation. I guess it's all about storage tanks in Cushing, Oklahoma.

              1 vote
    2. skybrian
      (edited )
      Link Parent
      I assume, generally speaking, the oil needs to go somewhere and they are paying for someone to take it away. I think the details of why they can't stop would be interesting, though. Update: Matt...

      I assume, generally speaking, the oil needs to go somewhere and they are paying for someone to take it away.

      I think the details of why they can't stop would be interesting, though.

      Update: Matt Levine has a nice explanation of the financial side of it.

      8 votes
  3. [3]
    JoylessAubergine
    Link
    Does anyone know what this means on a geopolitical level? Lack of oil the implications are obvious even cheap oil i can sort of understand but literally-cannot-give-it-away oil is unprecedented.

    Does anyone know what this means on a geopolitical level? Lack of oil the implications are obvious even cheap oil i can sort of understand but literally-cannot-give-it-away oil is unprecedented.

    2 votes
    1. skybrian
      (edited )
      Link Parent
      This started when Saudi Arabia, Russia, and other oil-producing countries couldn't work out a deal to cut production. There is only so much storage, and when it all fills up, things get crazy....

      This started when Saudi Arabia, Russia, and other oil-producing countries couldn't work out a deal to cut production. There is only so much storage, and when it all fills up, things get crazy.

      Negative prices are temporary, though. Things are out of equilibrium but some oil producers will slow down and Saudi Arabia and Russia have apparently worked out a truce already. But it will take a while to get to a new normal (at a low but not crazy price).

      7 votes
    2. unknown user
      Link Parent
      The cost of storage now exceeds the price traders are willing to pay, and since oil production can’t easily be spooled down (both in terms of infrastructure and geopolitics), it’s cheaper to sell...

      The cost of storage now exceeds the price traders are willing to pay, and since oil production can’t easily be spooled down (both in terms of infrastructure and geopolitics), it’s cheaper to sell oil below $0 than it is to do anything else.

      6 votes
  4. skybrian
    Link
    From the article:

    From the article:

    On Monday, a technical oddity exacerbated the price plunge as traders fled the May futures contract ahead of its expiration tomorrow, driving it down as much as 78% to the lowest level since futures began trading in New York in 1983. The following month’s contract fell 11% to $22.22 a barrel. CME group said it’s possible that May WTI contract could trade negative.

  5. [4]
    unknown user
    Link
    If you're paywalled, try WSJ: https://www.wsj.com/articles/oil-prices-slump-as-crude-storage-shortage-intensifies-11587382034
    4 votes
    1. [2]
      cfabbro
      Link Parent
      WSJ has a hard paywall. At least Bloomberg's soft paywall/nag screen can be gotten around with Reader View in Firefox, or by disabling javascript on the page using uBlock. ;)

      WSJ has a hard paywall. At least Bloomberg's soft paywall/nag screen can be gotten around with Reader View in Firefox, or by disabling javascript on the page using uBlock. ;)

      6 votes
      1. unknown user
        Link Parent
        Ah, seemed to be the other way around for me: I was able to read the WSJ article immediately but was hard-blocked by bloomberg. Paywalls are all so contextual these days anyway.

        Ah, seemed to be the other way around for me: I was able to read the WSJ article immediately but was hard-blocked by bloomberg.

        Paywalls are all so contextual these days anyway.

        2 votes