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.
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.
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.
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.
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?
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.
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.
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).
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.
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.
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. ;)
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.
It's at negative $40 a barrel. Literally wtf.
Related: https://edition.cnn.com/2020/04/20/business/oil-price-crash-bankruptcy/index.html
Is this a typo or was the value actually negative? How does that even work?
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.
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.
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.
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.
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.
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:
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?
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.
I found an explanation. I guess it's all about storage tanks in Cushing, Oklahoma.
This is why curiosity is important.
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.
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.
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).
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.
From the article:
If you're paywalled, try WSJ:
https://www.wsj.com/articles/oil-prices-slump-as-crude-storage-shortage-intensifies-11587382034
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. ;)
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.
Or just use outline: https://outline.com/rnyTqX