Someone explain -40 oil to me.
And I know a little about oil markets. I didn’t think going negative was that silly. But I think being reasonable at some point it’s worth paying to cap a well maybe -$10.
I keep thinking something is wrong with market structure when things can go that far. Market moving to fast before guys can figure out how to correct an imbalance.
So with oil futures you need to close out of your position by a certain day unless you want to deliver or take physical delivery. Today a bunch of people who had no interest in taking physical delivery started to sell to close out their positions. The trouble is that there is very little demand for crude from a refinery standpoint since nobody is driving among other things. So the only other avenue for people buying is people who can stick in storage until prices are more attractive (a few months out). Trouble is people have been buying up and filling up storage for the past couple months and there is no more left so nobody can take. As you can see a bunch of forced selling with nobody able to take the crude due to storage issues created a perfect storm.
If you look at the futures curve you can see the huge downward move is related to the contract role.
Ya I get all of that.
-40 is still a cartoon price. And I believe there are economic alternatives to storage. Such as capping a well.
I’d be shocked if the actual delivery date people are paying -40. My guess -5 tops. The physical market will work it out.
That’s a phase 1 answer. Some point other economics kick in.
The thing with the physical market is that yeah for some grades of crude and locations you will see shut ins and no more exploration but it's not like all of the permian is going to shut in just from this one off (hopefully) event. Hopefully someone with more experience will comment
Right, but how is a negative price justified?
If you are a non-physical player, then it will often be cheaper to get rid of a contract at negative prices than deal with physical issues and because of storage issues nobody can take the other side. As for pure physical market say you need to clear storage or pipeline space for more valuable grades, it can sometimes make sense to sell undesirable grades for negative prices. Don't you trade physical commodities?
Any idea who got blown up in this move today?
we won't know till tomorrow at the earliest....and thats only if it was a real blowup. only 13k contracts traded negative today
I honestly think they just need to stop trading for the day after a certain price move. I’ve heard speculation it was just little guys blowing up.
Problem is if you let unlimited moves occur when there’s a position imbalance then you end up tapping out a ton of potential trading liquidity. In 5 minutes physical guys can’t figure out a whole new way to store oil that was unprofitable at $5 a month but very profitable at $70 a month. Economic forces can’t fix something that quick. Been thinking about that in a lot of products that they need to slow things down.
If you think it can hit -10, why can’t it hit -35? DoesN’t make sense. It went to -37 because the sellers were more motivated than the buyers, happens often in gas. It’s alot of market psychology at that point. When you absolutely have to get out, you’re hitting bids no matter what because others may hit bids before you and emotions take over.
Also- you say -10$ to cap a well? The “cap a well” level we crossed weeks ago.
Can you explain that? I saw pricing of I think $500k to close a well. Which I’d think at -40 just about every well is more profitable to close.
Obviously many wells were not capped.
A couple of things that seem to be confusing a lot of ppl (here and elsewhere):
Thank you for this well articulated explanation, it is quite helpful
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