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US oil prices turn negative as demand dries up

bbc.com

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Re: US oil prices turn negative as demand dries up

#41

Post by RandomBacon »

hunter2_ wrote: post #33
paxys wrote: post #27

Earlier quoted context omitted.

I bet all the lawyers who put such clauses in futures contracts are feeling pretty smug right now. I can imagine an oil producer going "Why on earth do we need to put this in the contract? Of course they'll accept delivery. If they don't then that's great for us."

Eh, they probably thought it (however unlikely) could happen for reasons other than a pandemic. Like unprecedented green energy incentives leading to everyone suddenly driving an EV.

For most people it's going to be cheaper to continue to use or buy a used gasoline vehicle than it will be to buy a new electric vehicle.

Re: US oil prices turn negative as demand dries up

#42

Post by jliptzin »

cheald wrote: post #9
pcurve wrote: post #3

anybody know how many barrels were actually sold at that price? $0 is one thing, but I'm shocked at the minus $38. It could not have been large.

You can look up the volume: https://www.marketwatch.com/investing/future/cl.1/charts -- between 2:20-2:25, EST, for example, volume was 748 contracts (748,000 barrels) at -$37.11.

Could be short covering

Re: US oil prices turn negative as demand dries up

#43

Post by perl4ever »

In one of the articles, it quoted someone from, I think, the CME, that said they were fully prepared in their trading systems to handle these negative prices with no hiccups.

What I immediately thought, that I haven't seen anyone else mention yet, is that there are some admirable programmers!

Re: US oil prices turn negative as demand dries up

#44

Post by nerfhammer »

fennecfoxen wrote: post #14
Vomzor wrote: post #11

How long would it take to build new storage tanks?

With regulatory approvals? Probably years. The smart equivalent is to get a tanker ship and just float it out at sea until someone wants the oil (usually just west of Africa, where you can easily dispatch it to whoever ends up needing it.) Not sure if it works quite as well with WTI instead of Brent crude, though.

They're already doing this & running out of capacity

https://www.forbes.com/sites/gauravsharma/2020/03/12/superta...

Re: US oil prices turn negative as demand dries up

#45

Post by anigbrowl »

jliptzin wrote: post #15
User23 wrote: post #13

Earlier quoted context omitted.

> cost of storing that oil is getting really high If anything, this is a wild understatement. Each contract represents 1000 barrels of toxic waste. You can't just have that stored in a shed or something. And all the commercial regulation compliant storage is gone. I'd be willing to bet you will have a hard time even finding a tanker truck to take it to a buyer, since the tanker owners themselves are going to be using…

Forgive me if this is a stupid question but they can’t hold a gun to your head to force you to take the oil, right? Can’t you just refuse the delivery if you have nowhere to store it? Is there language in the contract for this kind of situation?

Well, you'll be on the hook for the storage costs until you arrange somewhere for it to go, so in that sense, yes they can. Yeah, you can sell the oil to someone else in the future, but when? Meantime, you owe rent.

Re: US oil prices turn negative as demand dries up

#46

Post by saagarjha »

markdown wrote: post #40
User23 wrote: post #17

Earlier quoted context omitted.

That's not a stupid question it's an excellent one. If you don't take delivery you're in breach of contract. The penalties for that are going to depend on how the judicial process works out. This has never happened before, so I don't know how it will play out other than that it's going to be wildly messy. Probably far messier than anyone, myself included, is imagining.

At the risk of sounding stupid, I have to ask... Would it be possible to simply pump the oil back into the ground wherever the closest oil field is?

That sounds like it'd get the EPA involved if you just dumped it, and I would expect that putting oil into an actual oil well is not easy.

Re: US oil prices turn negative as demand dries up

#47

Post by refurb »

jliptzin wrote: post #15
User23 wrote: post #13

Earlier quoted context omitted.

> cost of storing that oil is getting really high If anything, this is a wild understatement. Each contract represents 1000 barrels of toxic waste. You can't just have that stored in a shed or something. And all the commercial regulation compliant storage is gone. I'd be willing to bet you will have a hard time even finding a tanker truck to take it to a buyer, since the tanker owners themselves are going to be using…

Forgive me if this is a stupid question but they can’t hold a gun to your head to force you to take the oil, right? Can’t you just refuse the delivery if you have nowhere to store it? Is there language in the contract for this kind of situation?

Rejecting delivery would be no different than any other contractual arrangement, like buying a car or selling stock. If you decide to not follow the contract, you'll be sued.

Re: US oil prices turn negative as demand dries up

#48

Post by adventured »

markdown wrote: post #40
User23 wrote: post #17

Earlier quoted context omitted.

That's not a stupid question it's an excellent one. If you don't take delivery you're in breach of contract. The penalties for that are going to depend on how the judicial process works out. This has never happened before, so I don't know how it will play out other than that it's going to be wildly messy. Probably far messier than anyone, myself included, is imagining.

At the risk of sounding stupid, I have to ask... Would it be possible to simply pump the oil back into the ground wherever the closest oil field is?

In an arrangement with the US Government it could be put into the ground, elsewhere. Doing it without state permission would be an entirely different matter however. I'm not aware of any very large, privately owned underground storage caverns (such that they could make a dent in absorbing the over-supply).

This is being discussed:

"The U.S. Energy Department is negotiating with nine companies to rent about 23 million barrels of oil storage capacity in its Strategic Petroleum Reserve as part of a Trump administration bid to help drain the country’s growing glut of crude."

https://www.worldoil.com/news/2020/4/14/doe-working-to-lease...

Here is what the US Strategic Petroleum Reserve looks like (it can absorb some of our over-supply briefly):

> Four underground salt caverns on the coast of the Gulf of Mexico store the oil. That's a central location. The oil can be distributed to nearly half of the U.S. oil refineries either through interstate pipelines or via barges. It only takes 13 days for the oil to enter the U.S. market from the time the president first gives the order.

> There are two cavern locations in Texas. As of September 30, 2018, Bryan Mound held 235.3 million barrels in 20 caverns. Big Hill held 153.4 million barrels in 14 caverns. The other two are in Louisiana. West Hackberry held 199.5 million barrels in 22 caverns. Bayou Choctaw held 71.88 million barrels in 6 caverns.

> The maximum capacity of all four caverns is 727 million barrels.

There is also a good FAQ on it:

https://www.energy.gov/fe/services/petroleum-reserves/strate...

Re: US oil prices turn negative as demand dries up

#49

Post by refurb »

paxys wrote: post #27
fennecfoxen wrote: post #20

Earlier quoted context omitted.

This sort of refusal would likely has contractual penalties associated with it. Drillers and pipeline operators can't just shut down infrastructure by flipping a switch like it's nothing; it costs real money to perform shutdown procedures or restart pipeline pumps.

I bet all the lawyers who put such clauses in futures contracts are feeling pretty smug right now. I can imagine an oil producer going "Why on earth do we need to put this in the contract? Of course they'll accept delivery. If they don't then that's great for us."

That's actually a really good point. I've gone through plenty of contracts that are 20+ pages in length and wondered if they really need to be that long.

It's times like these that those contract clauses protect you, in a big way.

Re: US oil prices turn negative as demand dries up

#50

Post by MiroF »

foota wrote: post #36
mike_d wrote: post #22

Earlier quoted context omitted.

> Producers already got paid for this production a long time ago Nothing requires a broker to be involved. Drillers can sell futures to "get paid now" for future production, and likely did so to cover expenses in these chaotic times. If they issued a contract for 1000 barrels on the 1st of the month, produced that 1000 barrels on the 10th, and have an unsold contract on the last day of the month - they are screwed.

I'm confused, isn't issuing a contract bearish? They would be able to make a large profit but closing their position, wouldn't they?

Issuing a contract is bearish or bullish depending on the price.
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