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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

#111

Post by rmason »

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?

Actually with LP gas that's a pretty common storage method in Michigan.

https://www.mlive.com/news/2016/01/michigan_has_most_undergr...

Also there's some underground cave like structures East of Grand Rapids where they store fuel as well.

Re: US oil prices turn negative as demand dries up

#112

Post by tomc1985 »

CydeWeys wrote: post #100
baud147258 wrote: post #51

Earlier quoted context omitted.

Doesn't the oil just come out of the oil well from its own pressure? Which would make pumping oil back in the oil field complicated

There's lots of empty oil fields out there though. Many of them could hopefully be refilled just using gravity?

The US Strategic Petroleum Reserve is stored underground, surely they could build a similar reservoir

Re: US oil prices turn negative as demand dries up

#113

Post by ThrustVectoring »

alasdair_ wrote: post #76
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.

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.

The position is collateralized, all this does is lose you money.

Re: US oil prices turn negative as demand dries up

#114

Post by Talanes »

joecool1029 wrote: post #90
burfog wrote: post #70

Earlier quoted context omitted.

Pelosi blocked that. The workaround is to cheaply rent out the reserve as storage space, with the hope that someday a better congress will allow purchasing the oil.

>Pelosi blocked that. Why should the American people pay to fill it when they can now be paid instead to store the oil? The market's decided that the toxic asset needs to go somewhere and the speculators that bought it (not the producers) will pay. >The workaround is to cheaply rent out the reserve as storage space Cheaply? They took a risk in speculating and it didn't work out. The solution is to give them a choice:…

I can understand the impulse, and absent any middlemen it would make perfect sense to have the government step in to buy excess production during a crisis to fill national reserves.

But we have speculators who sold us the idea that their profits brought stability to the market, so make them keep playing by their own rules.

Re: US oil prices turn negative as demand dries up

#115

Post by koolba »

tomc1985 wrote: post #112
CydeWeys wrote: post #100

Earlier quoted context omitted.

There's lots of empty oil fields out there though. Many of them could hopefully be refilled just using gravity?

The US Strategic Petroleum Reserve is stored underground, surely they could build a similar reservoir

You could. Though it’d cost billions of dollars and would not be done by the time the contracts expire and deliver needs to be taken.

Re: US oil prices turn negative as demand dries up

#116

Post by rco8786 »

propter_hoc wrote: post #10

So 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…

How is this not a good time to buy oil. Assuming a 5+ year time horizon.

Re: US oil prices turn negative as demand dries up

#117

Post by nimchimpsky »

csense wrote: post #83

If you owned an oil ship, what stops you from getting paid $25 a barrel to fill your ship up with oil, sailing to international waters, dumping it all in the sea, then go right back to port and do it again and again getting paid $25 a barrel each time?

ethics ?

Re: US oil prices turn negative as demand dries up

#118

Post by ThrustVectoring »

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?

You are required to post cash collateral in order to take out a futures position. It's calibrated so that the cost of abandoning that collateral is large enough to basically be a gun to your head. Furthermore, when the price of the contract moves, they mark-to-market your collateral and credit/debit you your daily gains or losses.

Basically, the people holding the contracts have to either sell at a negative price to cover, pay to take delivery, or give up cash collateral that's worth even more money than the previous choices.

Re: US oil prices turn negative as demand dries up

#119

Post by ThrustVectoring »

csomar wrote: post #78
propter_hoc wrote: post #10

So 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…

> 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?)

They have legitimate reasons why they want to deliver their contracts. Crude oil is highly toxic, they only have so much storage available, and shutting down wells incurs significant costs. If they don't buy back their short futures position at -$25/barrel, that means shutting down costs them at least $25 per barrel no-longer-produced.

Re: US oil prices turn negative as demand dries up

#120

Post by lumost »

rco8786 wrote: post #116
propter_hoc wrote: post #10

So 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…

How is this not a good time to buy oil. Assuming a 5+ year time horizon.

It's a physical asset, with strict environmentally regulated storage requirements. Holding it speculatively for 5+ years requires that the speculation will pay in excess of the storage fees compounded at a reasonable risk adjusted rate of return for the 5 year duration.

This is a great deal if you happen to own cheap oil storage, I wouldn't be surprised if the main buyers of these contracts are the storage companies.

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