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.

 

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?

 

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.

 
Most Helpful

A couple of things that seem to be confusing a lot of ppl (here and elsewhere):

  1. Crude did not "go negative" one futures contract did (that was close to expiration)
  2. CME futures are physically settled in Cushing, OK
  3. The physical crude mkt has been well below the futures, part of what happened is the financial side got slammed down to where the physical mkt has been
  4. Given COVID-19, products demand (gasoline, jet fuel, etc.) evaporated that ultimately pushed everything back upstream no demand for gasoline -> refiners don't need to make gasoline -> refiners don't need to buy crude oil -> demand for crude collapses
  5. What about storage, aren't there tanks? Yes there are, a lot of tank space has been leased. So why they may not be full of crude yet, the space is spoken for.
  6. At what point does it become "economic" to shut in a well. That is a VERY complicated question; there are many things to consider: diff spread to well, vol agreements, lease agreements, pipeline commitments, costs of actually shutting in vs. letting it decline naturally, decline rate of well, etc etc etc.
 

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