Relevant: That Time I Tried to Buy an Actual Barrel of Crude Oil
https://www.bloomberg.com/news/articles/2015-11-03/that-time...
US oil prices turn negative as demand dries up
71–80 of 130 posts
Re: US oil prices turn negative as demand dries up
#72Earlier quoted context omitted.
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…
Why don't we just take delivery of futures contracts directly? Isn't this a great time to fill the reserve?
The USG can top off the reserve at any time and it'd be chump change. They're spending trillions of dollars these days. They're not concerned with a few billion dollars worth of oil here and there.
Re: US oil prices turn negative as demand dries up
#73More specifically, West Texas Intermediate Crude futures for early May delivery are sub-zero. Late-May delivery is more expensive. This is in part a reflection of the fact that the oil producers have already been paid for the output and are contractually obligated to deliver it, but no one actually really has a use for it once it is there, and it will cost money to transport or store it.
It can't just be producers being contractually obligated to deliver it, can it? If that was the case, couldn't they close out their obligation by buying back some of these futures (at a profit), and "delivering" it to themselves by reducing production? So it must be that reducing production itself is not possible or too expensive for this to make sense.
Re: US oil prices turn negative as demand dries up
#74Futures prices are significantly higher than $0. This is less noteworthy than it seems. https://www.marketwatch.com/investing/future/crude%20oil%20-...
Futures prices were indeed negative, specifically the soon-to-expire May contract. June and beyond stayed positive, but this is the first time in history that the contract (any expiry) has traded at negative prices. This is a noteworthy event.
Re: US oil prices turn negative as demand dries up
#75Although this is largely a paper phenomenon, the thing to pay attention to now is ripple effects.
A few weeks ago, Capital One was granted a regulatory waiver from the CFTC over its oil derivatives positions - a waiver it since declined to use:
> The registration is related to Capital One’s commercial lending to the oil and gas industry, a relatively small part of its overall business. The bank enters into commodity swaps with energy clients to help them mitigate the risk of energy price swings and the related borrowing risks.
https://www.reuters.com/article/us-health-coronavirus-capita...
Most people don't immediately think of Cap One as an oil futures player. But its lending business caused it to enter the market to hedge some of its loan portfolio.
Given the highly unusual nature of what happened today, it wouldn't be surprising to see future announcements of banks or other financial institutions getting into trouble over commodities derivatives bets going pear-shaped.
Re: US oil prices turn negative as demand dries up
#76Earlier quoted context omitted.
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?
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.
I'm surprised that someone didn't just corral some bankruptcy-proof people together and offer them some cash each to be the holder of record.
Re: US oil prices turn negative as demand dries up
#77Earlier 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?
I love this question! Mainly because first I laughed at "But that would be silly -- we spent all this effort taking it out of the ground", but on second thought it represents a reasonable thought of "We got it from the ground, therefore the ground isn't the worst place for this stuff maybe?".
In crux, thanks for asking :)
Re: US oil prices turn negative as demand dries up
#78So they start off the article with this statement: "That means oil producers are paying buyers to take the commodity off their hands over fears that storage capacity could run out in May." This statement is actually totally false. Producers already got paid for this production a long time ago when they initially sold the futures contract. What has actually happened is that as the expiry of the May futures contracts a…
> Producers already got paid for this production a long time ago
It's a future market for the public. You don't know which side you are trading with (trader or producer) but they are all trading at all times even if they are not transacting.
Here is an example: Let's say you are a producer that a sold a future contract a long time ago at $25. You have the opportunity to buy that contract again today at -25$ and close your position. You have no oil to deliver + you made $50 per barrel more than what oil is trading at in Europe.
Given that we can conclude:
- Big producers are refusing the close positions to keep prices down. (or maybe they have a legitimate reason why they want to deliver their contracts?)
- The market temporarily dipped because of leveraged trading. Traders were a sleep/slow to react. (they don't have automated bots?)
- This price range (maybe not -25$ but maybe $5-0) is the real price of oil for these few days.
Re: US oil prices turn negative as demand dries up
#79Earlier quoted context omitted.
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…
Why don't we just take delivery of futures contracts directly? Isn't this a great time to fill the reserve?
The reserve is already 90% full.
Re: US oil prices turn negative as demand dries up
#80So they start off the article with this statement: "That means oil producers are paying buyers to take the commodity off their hands over fears that storage capacity could run out in May." This statement is actually totally false. Producers already got paid for this production a long time ago when they initially sold the futures contract. What has actually happened is that as the expiry of the May futures contracts a…
> 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…
This is a very good point - unlike tree logs or something, you can't just pile up oil.
I dont even think youd be allowed to burn unrefined oil in mass.s