Here’s your link. Oil at -$0.22/barrel for May futures. The price of oil has been in free fall all day, and this is where it’s at right now. So producers will pay you 22¢/barrel to take it off their hands? Cool!
So if I wanted to ‘buy’ some of this oil (no, I’m not thinking I could really do it, I’m sure it’s trickier than it looks, hence this OP!) at this below-zero price, how would that actually work?
ETA: Also, if you’re Russia or the Saudis in the midst of their price war, at what point do they think, “hey, maybe it makes more sense to leave the oil in the ground for a few weeks”?
I’m thinking the answer might have something to do with either the supply chain (e.g. that there’s already more oil on tankers headed this way than anyone wants to buy), storage costs, the nature of futures contracts, some combination of the above, or a mix of that and other factors that are completely outside of my knowledge.
But yes, this is intended as a GQ question, no matter how vaguely I put it in the OP.
Very near term contracts for crude oil are typically for waterborne (i.e. on board the tanker now) crude oil. The producer pays thousands of dollars a day for the use of tankers. With crude oil consumers cutting back so much, paying them to take the oil off their hands actually makes sense, in the sense of being the least bad course of action.
Prices for longer term contracts (i.e. oil still in the ground) are lower than in recent years, but still reasonable.
It seems to mean that the supply “pipeline” (metaphoric) is so full of oil that the companies producing it can’t store it all - and thus have to pay customers to take it off their hands, rather than paying a larger amount to construct, or rent local facilities to store it (but I could be wrong).
What turned negative was the futures contract for May delivery of West Texas Intermediate. Basically trading in that contract expires on Tuesday (at which point it becomes a matter of sorting out what physical oil gets delivered/claimed by whom), so all of the traders who are not intending to take physically delivery (i.e. most of them) need to close out their positions.
And right now there is more physical oil on the market than the world intends to use in May, and there is limited space available to store oil, so in order to sell those contracts they have offer money to entice more people to want to store excess oil.
Here’s a few additional questions to add to the OP. Is it possible for the oil producers to “turn off the tap” so to speak? There was also mention made of oil tankers and the amount that the oil companies pay for them. Are these tankers typically owned by the oil companies and thus the amount they are paying is just an operating expense? Or are they paying some kind of fee to a separate oil tanker company that runs the ships?
Yeah, some of that oil’s on tankers, but presumably it’s only a few days away from a port somewhere with land-based storage tanks. Are they all filled to the brim?
These cites were for West Texas Intermediate (WTI) crude. But the U.S. is the main consumer of oil, and ten days are left in April. So this is domestic oil (no tankers needed, for the most part) that hasn’t yet been refined - maybe not exactly as it was pumped out of the ground, but close, right? So why don’t they just stop pumping? Surely that would affect the price of crude for May delivery - not to mention, what’s still in the ground can be stored there for free.
Incidentally, one thing I’ve read with respect to WTI as to why the contract is so hard hit compared to Brent crude, is that the WTI contract is for delivery to Cushing, OK, which is far away from any ocean, while Brent delivery is done on a north sea island, so if push comes to shove, Brent can hire tanker ships to store excess, while WTI you have to build buildings, which is harder.
Just to clarify: you mean tomorrow, and not Tuesday of next week, right?
That would certainly help explain why the market is doing extremely weird things right now, but why do futures close out their trading nearly ten days ahead of time? Wouldn’t expect it would take more than three or four days to sort out what goes where.
I do hope someone in the government is figuring out how to use this situation to fill up the Strategic Petroleum Reserve for next to nothing, assuming it’s not already full.
Due to the stoppage of the economy and the crash in oil prices over the past few months, there is way more oil on the market than can be supported by available storage.
The “price of oil” you hear about on the news is generally referring to the nearest expiring futures contract for delivery to the oil terminal in Cushing, Oklahoma. Under normal conditions, when the futures contract expires the buyers/sellers work out how they are going to physically exchange the oil at the delivery point. Right now, since there is no storage capacity, the cost of storing oil is extremely high. Refiners and others that are short futures (have to deliver oil) are unable to hold onto the oil themselves. The natural buyers also a severely restricted in taking any more delivery. A negative $40 price can be interpreted as an oil producer saying, “I’ve got a bunch of oil I can’t hold or store. I’ll give anyone the oil and $40 with each barrel to take this off my hands and figure out the logistics of storing it.”
Yes, definitely tomorrow. I assume that we could figure this all out in a few days, but the long lag period is historical – it could be as late as the 25th, and that is close to “three or four days” sometimes, especially if you only count business days. In fact, I think the reason why it is on a Tuesday is that Tuesdays are rarely holidays.
As I understand it, physical delivery can happen at any point during the delivery month, so there’s probably a lot of equipment booking/negotiation, &c.
West Texas Intermediate and Cushing, Oklahoma are just customary industry standards for grade and destination. It doesn’t necessarily mean that the oil is actually coming from west Texas or going to Oklahoma.
It is not…yet. Trump proposed filling it up. Congress did not include funding to buy the oil when passing the Cares Act. What was happening last week was negotiating with oil companies to rent the excess capacity to them.
The SPR is a lot less strategically useful than it used to be, anyway. The US flirts with being a petroleum exporter depending on price, since our cost of production is higher than some major suppliers. We also have an alliance with the 4th largest exporter in the world conveniently located on our northern border. We can reasonably supply our needs in the event of a major war that cuts us off from oil markets. The storage does serve a function to help smooth major market changes. We can achieve that benefit by just renting the space to the oil companies.
If the price goes that negative I think it’s actually a pretty strong indication storage is full, in or near the Cushing complex that is. Not the whole world necessarily. The last trading day for the May contract is tomorrow. If you’re long when the contract stops trading you must take delivery of 1000 bbl per contract at Cushing next month. So without being able to arrange logistics to store it or get it into a pipeline from Cushing to where you can store it somewhere else, you’d accept even a negative price to get out of the contract before tomorrow. -27.80/bbl says it’s really difficult to arrange that.
Normally people wouldn’t even look at the May contract now, since that kind of delivery issue can distort the price of an about to expire contract, though never like this before. There is around 5 time as much open interest in the Jun contract, considered ‘lead contract’ which settled today at +21.36 down ~15% . That’s more indicative of the broader situation in the US oil market, oil under a lot of pressure but there’s still potential to store it or move it further away from the physical settlement point of the contract and…
2. true, more time to stop pumping it out of the ground before the Jun contract stops trading late next month.
Storage around the globe is full. When the price of crude fell due to the price war between Russia and Saudia Arabia, most everyone bought crude and filled up their reserves, tanks, tanker ships, etc.
Demand for crude and crude products are at an all time low. Very few people are driving and very few planes are flying due to the COVID-19. Near term demand is not expecting to rise.
So there is no where for oil to go in the short term.
This is a pricing signal to producers to slow down, or even shut down production.
The June forward WTI price is still above $20 / barrel.
If you hold the long side of the contract you may have to take delivery.
Not clear if anybody has explained this clearly, maybe leahcim has. This has only indirectly to do with physical oil buying and selling. It has everything to do with speculating.
Speculators hold futures contracts trying to profit from price movements but never intending to take delivery.
The panic is because speculators were caught holding the long side of the contract and now have trouble getting out of their position.
I think there is somewhat enough storage still available for delivery, but speculators don’t want the paperwork (and maybe small speculators are getting margin calls, although I don’t see much small speculators right now).
The chart doesn’t look really out of the ordinary. What is happening is commercials overwhelmingly holding the short side of the contract and unwilling to roll over like they would normally do, combined with speculators (large speculators in this case) panicking.
Not the whole world necessarily. The last trading day for the May contract is tomorrow. If you’re long when the contract stops trading you must take delivery of 1000 bbl per contract at Cushing next month. So without being able to arrange logistics to store it or get it into a pipeline from Cushing to where you can store it somewhere else, you’d accept even a negative price to get out of the contract before tomorrow. -27.80/bbl says it’s really difficult to arrange that.