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Oil plunges below zero for first time with May contract ending

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Re: Oil plunges below zero for first time with May contract ending

#351

Post by cwhiz »

frankchn wrote: post #50

Note that this is for the May contract, which closes tomorrow, and anyone left with a contract then will have to actually take delivery of the physical product. Since we are in supercontango (oil storage is full, causing spot prices to be significantly lower than forward prices), I am guessing that traders who are still holding on to contracts and don’t have available storage have to unload contracts pretty quickly.…

The May contract was still selling at $22 as of last Tuesday. I don't know much about oil markets but my base assumption would be that we would do this whole thing over again in 30 days unless something significant happens in consumption or production? When do the output cuts begin?

Re: Oil plunges below zero for first time with May contract ending

#352

Post by throwaway_USD »

greenshackle2 wrote: post #341
throwaway_USD wrote: post #59

Usually by the time you see commodities activity hitting the front page of HN the bets are in and the market is about to take a wild swing in the other direction. It is very easy to side with the news on oil right now that there is a historical over supply (so much so we have no place to store it any longer, and even considering paying producers to leave it in the ground) and we have a historical drop in demand...so…

WTI was at -36.25$ just now. I hope you didn't put your money where your mouth is.

>Usually by the time you see commodities activity hitting the front page of HN the bets are in...

My bet was already in...however, I do think once we start seeing the news like this proliferate we will see an odd swing by Wednesday or Friday. Still my question was sincere, if we see a swing, I don't know what the markets rationale would be...that said where can it go from negative but up

Re: Oil plunges below zero for first time with May contract ending

#353

Post by giarc »

hcs wrote: post #332
giarc wrote: post #294

Anyone with insight what we will see tomorrow when the May contract issue isn't in play?

Here's June: https://finance.yahoo.com/quote/CLM20.NYM?p=CLM20.NYM

So tomorrow the price on say Yahoo Finance page will just show the June price of $22 or whatever it will be at opening? So it's not really a continuous price.

Re: Oil plunges below zero for first time with May contract ending

#354

Post by donarb »

option_greek wrote: post #305
tempsy wrote: post #210

Earlier quoted context omitted.

It’s not that there’s no storage capacity left, it’s that if you have May contracts you are going to pay a big premium to store oil in Cushing as capacity decreases in future months. The discount reflects the storage cost premium.

Any idea how much it takes to store oil in Cushing during normal times ?

This article from March 25 states that rates at Cushing more than doubled from 20 cents per barrel per month to 50 cents since February.

https://www.reuters.com/article/global-oil-storage/global-oi...

Re: Oil plunges below zero for first time with May contract ending

#355

Post by darkwizard42 »

jliptzin wrote: post #231
tempsy wrote: post #207

Earlier quoted context omitted.

It’s called super contango. And storage has not run out yet. Cushing is not full. The problem is traders are anticipating storage will become very expensive as remaining capacity decreases, so if you’re holding on to May contracts and you’re not using the oil because there’s a glut right now then you’re going to be paying a lot more to keep storing the oil for future months as storage costs go up. The huge discount r…

If cushing is not full, why aren't people buying at $2 a barrel now and storing for one month, selling the June contract at the same time and collecting a $20k profit per contract?

Many have answered about storage costs. Easy way to think about it might be a grocery store.

You hear about a sale on cereal for $0.01 a box. Great deal but then you find out that you can't walk there, you can only take Lyft/Uber and it costs $100 each way to get to the store. So in reality its not as good a deal as it sounds.

Re: Oil plunges below zero for first time with May contract ending

#356

Post by nopinsight »

asdfman123 wrote: post #329
nopinsight wrote: post #149

If the pandemic lasts longer than 6 months, which is quite likely, many high-cost oil producers might not survive. Some would argue this could lead to shortage and a much higher price later on, but long-term oil demand could also be affected. There might be some semi-permanent change in people's behaviors if the epidemic continues for many months. Many people will form a habit of doing more things at home/online: mor…

But a key part of this is simply how much Russia and Saudi Arabia want to pump. The whole purpose of the price war was to drive high cost producers out of business, but that combined with the severe drop in demand sent the price to oblivion. Also, this could catalyze a shift to people doing more things remotely. But will that reduce oil consumption significantly? Don't forget about induced demand. Right now, I can he…

Low traffic won't persist long-term, so most people with a job in a city will not move, unless they and their partner both get stable remote jobs.

Increased use for transporting goods is plausible, but generally it is more efficient than transporting people.

For most products, lower oil price might not contribute much to lowering its manufacturing cost, only for logistics, so it's unclear how much induced demand will apply to finished goods.

Transportation accounts for 69% of US petroleum consumption. https://www.eia.gov/energyexplained/oil-and-petroleum-produc...

Energy use (from all sources) per unit of GDP has slowly declined over the years.

Re: Oil plunges below zero for first time with May contract ending

#357

Post by bmelton »

colinmhayes wrote: post #317
aguyfromnb wrote: post #260

Earlier quoted context omitted.

> why aren't people buying at $2 a barrel now and storing for one month, selling the June contract at the same time and collecting a $20k profit per contract? Good question. The answer is because they don't think it will be profitable. Why aren't you ?

I've never been to Cushing Oklahoma. I feel like it should be possible to build a big tank in a week or two. Why isn't available storage space skyrocketing?

I honestly don't even know if I can fathom how you could get permitted to build such a tank in a couple of weeks, but the answer to why that isn't happening _right now_ is probably because nobody wants to lay out a bunch of capital for a business that might do well contemporaneously but that has no future.

Either things settle back down to normal at some point, in which case you've made some revenue, but probably not recouped your investment. The Cushing facility managed to build 7 million bbl capacity in the early 90s for $60 million. I expect it would cost $80-100 million to build today. Current (inflated) storage costs are 50 cents per barrel. Let's say that rises a LOT and skyrockets to $2 - that's a gross of $14 million per month. Assuming $0 in overhead, you'd need for this contango to last for another 7 months to break even. If we assume something like a 30% margin, then you'd need it to last around two years.

Alternately, things don't return to normal. The market becomes depressed enough that airliners barely fly, and the global world consumption falls. The oil you're storing becomes cheaper to the point that storing it costs more than buying it, and there's nobody to sell it to. Your customers default, and your investment quickly becomes the thing that bankrupts you.

Re: Oil plunges below zero for first time with May contract ending

#358

Post by rocha »

eru wrote: post #278
aguyfromnb wrote: post #257

Earlier quoted context omitted.

> I asked why they weren't prepared on Friday. What, exactly, do you expect them do to "prepare"? Friday they had more time to unload the contracts, and today they have less.

How to prepare: Sell futures on Friday, buy today (to close out the position). Profit from the predictable price difference.

They have been trying to sell, but none was buying. The closer you get to the expiration date, the lower you are willing to go to sell. Since contracts expire tomorrow, traders are willing to go all the way to avoid getting physical delivery.

Re: Oil plunges below zero for first time with May contract ending

#359

Post by chrisfinazzo »

Mikeb85 wrote: post #112
chrisfinazzo wrote: post #100

Earlier quoted context omitted.

Is that correlated to the price of gas - if it ever was? I realize the above question is naive, but it's clear that the Russians and the Saudis having a pissing match over supply just as demand dries up (because COVID) has caused prices to collapse. In some places, gas is under $1/gallon.[1] [1]: https://www.cnet.com/roadshow/news/gas-prices-average-drop-k...

Yeah gas prices mostly correlate to oil prices but also to demand for gasoline (hence the price always going up in the summer).

I meant this more in the sense of do they look at a specific benchmark to derive how prices are set.

E.g, If gas is based on WTI, then Brent can be up or down without affecting it much - Prepared to be wrong.

While they aren't in lockstep, it looks like they play off each other most of the time. As you say, seasonality has a role and demand for heating oil v gas depends on the time of the year.

Re: Oil plunges below zero for first time with May contract ending

#360

Post by gezh »

caseysoftware wrote: post #143
ping_pong wrote: post #130

Earlier quoted context omitted.

Yes, this almost happened to me once when I was trading futures. My broker called me several times throughout the day and I couldn't take the call. When I finally did, he told me to roll my contract forward that day otherwise I would have to take delivery of 1000 bushels of corn.

I'd love to hear from someone that got stuck with the 1000 bushels of corn (or similar). What do you do? How in the world do you manage that?

If I remember correctly, in contrast to WTI, you will get assigned a shipping/warehouse certificate for wheat/corn in a designated elevator somewhere. You'll have to pay the warehouse a daily carry cost but don't actually have to take it out of that warehouse (you can if you want to).
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