This is what happens when someone has to take delivery and no one wants to because there is nowhere to store the oil.
Those who thought $1 was cheap, thought wrong.
You now get paid as much as $40 to take delivery of oil because no one wants May delivery.
May Delivery
The last day for May delivery trading is today. Traders long the May contract are in deep trouble.
June Crude
The price of crude for June delivery touched $20.19, down from $55.00 in February. Those rolling crude contracts expecting the price to go up have been hammered for months.
The Art of a Failed Oil Deal
Supposedly, Trump saved the oil market with his production cut deal with the Saudis earlier this month.
On April 14, the Wall Street Journal crowed about The Art of an Oil Deal.
I panned that idea on April 15 in The Art of a Failed Oil Deal.
These were my comments.
Real Deal
As soon as storage facilities fill up, nations will have to curb production.
Trump did not negotiate a thing that was would not have occurred on its own by brute force of the market.
A cut of 9-10 million barrels was not enough. So the price fell after a brief market surge.
Hooray, the Saudis saved face. But what good did it do? The cuts were coming because they had to.
Voilla!
If demand destruction amounts to 20 million barrels per day, guess what?
Production will ultimately fall by 20 million barrels per day, deal or no deal.
I believe we now know which view was correct.
Conversation with an Oil Trader
I asked Phil Flynn, at the Price Futures Group how many contracts were in play.
His estimate was “about 50,000 contracts“
Each penny in movement is worth $10. At negative $40.00, each long contract was worth negative $40,000.
-$40,000 * 50,000 = -$2,000,000,000.
Traders likely bought those hot contracts at some positive value so the manage futures crowd just got carted out.
I expect some hedge funds got blown out of the water today.
Mike “Mish” Shedlock
Black Gold is now the Anti-Gold. You pay to have Physical Oil taken away from you and you can’t get Physical Gold for love nor money. I see the CME has now redefined physical delivery of paper gold to be satisfied by delivery of a different type of paper gold.
Isn’t this a twofer for the miners? record prices for their product, plummeting prices for their major expense: energy.
This negative price of oil should be shut down immediately…CME is changing the rules and telling people that you are now overpaying for oil even at a price of zero…without being able to calculate risk by definitive amount of loss the asset prices are now worthless if your losses are not finite.
You want to do the same with sewage, garbage and nuclear waste as well? Ban people from paying to have it take off their hands?
It’s costly to store oil in large quantities safely. The negative price is underpinned by real economics. Not just some construct arbitrarily cooked up by CME for the amusement of casino punters.
Who said ban anything? Without being able to hedge/price risk at a set value there is no way to price said risk when it it can go down infinitely.
BTW, I did not know sewage, garbage and nuclear waste were highly sought after commodities for a functioning economy and traded on the open market for price discovery…get real
Stuki is correct. Why would you want to get rid of one of the few remaining avenues of price discovery? These speculators had to unload contracts because they couldn’t take delivery. Serves them right being in a game they had no business playing.
simple the price is zero…you going to pay someone to buy your house when this nonsense spreads to all asset types, didn’t think so
Why on earth would it spread to housing or all asset types? These were futures contracts that required physical delivery, which the holders lacked the capacity to accept. Therefore, it was worth it for them to sell at a loss.
You sound like you’re just spouting off about this without thinking.
interesting, the negative value for the future’s contract is an expression of market interest and its ability to take delivery. As you said Mish, once the tank is full there’s simply no way to add more.
The second question is what is happening in other commodities? Copper for example; are traders sitting on vast inventories…
The next she to drop will be other physical commodities, but not like oil or NG
“Crude Price Falls to -$40: Yes, Negative”
TILT
I filled up my tank a couple of weeks ago. I only drive to the grocery store and back. Maybe 5 minutes away. My tank is still full. Too bad I can’t take advantage of cheap gas prices.
Hey, can’t we save the oil industry by simply reversing all our pumps? Pump all that Arab oil into the ground in West Texas. Save the jobs, and less import dependent.
The US does have a strategic oil reserve, and I’m sure they are pumping oil into it as fast as possible.
Yet I am still paying $2.70 for gas at the gas station Mish.
When price is this utterly disconnected from cost to deliver goods you know we are in deep shit.
In fact it was clarified on CNBC that the storage facilities are not full but that the spare capacity is already contracted out. Meaning Cushing can’t accept new oil being pumped.
Then there is this, Saudi Arabia is sending vast gigantic amounts of oil to the US to be delivered in the next matter of days and weeks.
I am thinking this is a ploy by SA to hurt American fracked oil, they have been trying to hurt US production via lower prices for some time, but since America became a net exporter a few years ago nothing they have done worked. OPEC is just too fractious. You might say.
But, what if SA bought up all spare storage capacity then shipped tens of millions of bbl of oil to the US? They do not even need to have a buyer for that oil, all they have to do is rent out space in Cushing then fill it up with Arabian oil. That gives no place for American oil to go to once out of the ground, and the irony is unless SA was mastermind behind Covid they could not have known that demand would drop by more than 50% for petroleum, and now that demand has been halved they are just damned lucky they rented out that capacity in our storage because Aramco would otherwise pretty much have to stop pumping.
I have heard experts on TV say actual damage to demand is about 20 million bbl per day. I think it is more than that. And I think it will take longer for demand to get back to normal. Unless the Fed is willing to take delivery on billions of gallons of crude this is going to fuck up oil in the worst way possible. Some producers will tank, but refiners have never been more profitable, they are getting crude at 1960’s prices and selling on to distributors at 1995 prices, who are getting it at 1995 prices and selling at 2015 prices. But the retailers are the ones really making out like every day is Christmas, profits for gasoline and diesel are at 300+ percent of the 2 year moving average. Stations that made $5 grand per wekk just last year are profiting over $15k per week now.
They will be hard hit as competition sets in, that will go negative and for a while the US will see gasoline below a buck everywhere. But, the carnage will not stop. I predict it will be June of next year before price stabilizes at a consumer screwing point around $2.
But, why would the Saudis have sent such a vast amount of oil to the US just now? By the time it is delivered it will be the Saudis paying to have it delivered. The only answer I can come up with is they are taking a multi billion dollar hit to fill our storage facilities so our fracked oil has nowhere to go. That would shut down our drillers which their price manipulations have so far failed to do.
Thankfully oil is mostly a fungible product. Meaning that too much oil will just prolong their problems. Producers are producing more than the world demands. That means price drops. And under the circumstances that means price at the pump better drop soon to reflect reality or the entire energy delivery system is going to get a socialist rethink.
Traders in these futures markets distort prices by buying oil when they can’t take delivery of it and/or selling oil they don’t have. They never expect the music to stop which is so foolish. So now a bunch of hedge funds/oil traders who bought futures HAVE TO PAY FOR THE OIL! That’s right – they have to buy oil that they cannot store and cannot sell. Futures contacts are real and if you can’t roll them over into a new contract then you have to legally pay up, or go bankrupt. This is why the price is negative – that’s the hedge funds/oil traders begging someone who is actually in the oil business to take this oil off their hands. Good luck with that! I’ll bet there is literally no storage space left. The little that was there is already spoken for so…. oil prices could go down from here. All oil producers need to shut down completely. How fast can additional oil storage facilities be built? Not fast enough.
When will they pay me to fill up my tank!
Time for the Fed to open up another “facility”!
Another facility to store the oversupply of oil
A federal facility to house the fedsters?
Definitely a conspiracy theory here…Trump, OPEC, et al. just needed stupid speculators to buy that phony rally so the important people could get out before this happened.
I predicted here a few weeks ago that if you can have negative interest rates then why not negative crude oil prices and I was laughed at.
I did not laugh Stan. But I wonder when I can go to the grocery store and get a cartload of food and stop to pick up my check on the way out.
The silver lining is that SOME rich dude (s) are going to lose a pile off negative oil prices. At least till they figure out how to screw the rest of us with them it will only be investor class getting hurt.
start pumping – oops guess we’re gonna have to dump this – just like dairy farmers are doing
Start paying you to fill up,every gallon of gas you put in your tank get a dollar rebate and with that $1200 govt check,EBT card,medicaid/obamacaid,free govt cheese,free govt wifi/HBO just lock it down permanently.
Trump recommending negative interest rate.
The man is a loonie, he obviously does not understand how that will affect the funding market. No one will loan anything.
When your economic illiteracy is severe enough that you believe the solution to sufficient overproduction to cause prices to go negative, is to “stimulate” and bail out producers, there simply isn’t any hope for you at all. You are forever doomed to be dead wrong about absolutely all and everything, until the day you die.
Sound like a milking scheme. Trump is about marketing an idea and it ain’t his.
Waiting to see barrels of oil pop up on FB marketplace…
Paddling pools on Ebay being packaged with fire extinguishers…
And stink extinguisher.
Clothes pegs.
It’s upside down world… Americans now know what it’s like to be in Australia. https://veryfunnypics.eu/wp-content/uploads/2014/09/funny-pictures-caution-australia.jpg
Where are the “Greenies”!!!??? Where are all the environmentalists….?????
Are we not now living in the world they have long sought? Are we now not living in a world where there’s no demand for oil? Where there’s no demand for production and workers either…..And, the trees soaking it up…. We’re seeing huge reductions in CO2…
Shouldn’t the Greenies’ be cheering all this on? But, all we hear are crickets….
They would be out and about if there’s no virus.
Apologizes to all – here they are….our “greenies”…
No need to listen to the “crickets” any longer…
Why would the Greenies be cheering? The way I see it, with oil (fuel) being so cheap, big SUVs and big pick-up trucks will be in vogue for those that can afford a new vehicle. I would not think that cheap oil is good for the electric car market.
The only thing the Greenies have to cheer about is the slow down in the economies and quarantining of the world that has crushed demand for transportation fuel.
Can storage for a barrel of oil be built for less than $40/barrel? Is that what this price signifies?
Seriously, what happens to the oil if there’s nowhere to store it?
So is Brent front month expiring in 9 days next to be in deep trouble?
Or do those producers/longs still have sufficient storage?
If only the gold contract for delivery would do this. I’d be happy to take physical delivery of gold for negative fiat 🙂
I read there are about 100 million barrels in those contracts. That’s roughly 435x435x435 cube of barrels. If each one is 2x2x4 ft that’s 900x900x1800 ft. That’s the size of an old quarry (I know of 2 that size where I grew up in rural Ontario).
Someone should offer to store the oil in an old quarry somewhere (pumping out water) or better yet in an old salt mine (already water tight) and make a fortune.
If miners learned how to mine the earth’s mantle and core, that could come true. Depending on which scientist you talk to, there is enough gold on and in the earth to cover it’s surface anywhere from 1 foot to 13 feet deep. Gold is heavy so it sunk toward the center of the earth out of our reach.
Quick, look! Greta is smiling!
Quick!!! Bend her over… We have a place to store it all.
lmao!
Global cooling and crop failure, mini ice age, polar bears in frankfurt eating people, and so on, a fairy tale come true.
Anyway, at negative prices they are paying people just to burn it, quite possibly only to spite her.
Oh, one of the few benefits of the corona virus: Greta’s gone from the news, ant let’s keep it that way.
Based on today’s MAY futures prices, Trump had no leverage to maintain US oil production levels in the OPEC+ negotiations last week. The US had no place to put any oil. Tanks were already full, and the expectation was they would remain full for a prolonged period of time. Trump’s tactic to assume the level of cuts Mexico was expected to make earned the US some sort of good will at a minimum, and most likely some undisclosed side deal with Mexico.
Are they finally going to pay for the wall???
This is today, bad enough.
What about next week ? Next month ??
Anyone with any practical knowledge of the oil patch knows that this is going to get (literally) messy, very messy indeed…
“Anyone with any practical knowledge of the oil patch knows that this is going to get (literally) messy, very messy indeed…”
Bankruptcies here. Social unrest, coups and revolution in the ME oil states – except Iran.
wootendw, we agree on shale oil bankruptcies here allright. Do we also agree that would mean massive unemployment leading to social unrest here, not just in ME ?
“Do we also agree that would mean massive unemployment leading to social unrest here, not just in ME ?”
It depends on how bad things get, and where. Areas where shale oil is, are less likely to have it. But, problems coming will not be confined to the oil industry.
“Social unrest, coups and revolution in the ME oil states – except Iran.”
Why “except Iran”?
FVP I think it is because Iran will not flinch at mowing down any unrest with lethal force. And because the Iranians are as fanatical as they come, also it is one of the few oil states not run by a single family. Or already having a war like Libya.
Yeah i been wondering what the social cost of 2 m dead in the us would be. The social unrest . Panic in the street etc. im sure will hear about the cost of shutting things down though.
Well, at least this means we’ll be able to drive monster trucks around cheaply in our future Mad Max world.
Now I just need to modify my Les Paul so it shoots fire out the headstock when I play it!
New stimulus: free Hummer to every American family
Nice! Cue the jokes about how much it would cost to retrofit a H1 for military use.
Personally, I’m holding out for a Marauder. I still remember the episode of Top Gear where I first saw one in action.
Some big player who bet on the price of oil will have to be rescued. You can count on another trillion repos from the FED.
I’m afraid so.
What happens if those who are long are unable to take delivery?
They jump.
Dig a deeper swimming pool, delivery is coming 😃
Isn’t the pickup point at Cushing though? There has to be some sort of permanent stinger they can bury into your brain for making a move like this.
I have never taken delivery as I am an ES day-trader but have researched the process in the past (for the gold market anyway) and this is my understanding of it.
Typically, if one winds up inadvertently long a physical delivery market past First Notice Day and is assigned, the broker / FCM or clearing firm will attempt to offset the contract against a short who is in the same position.
If that can’t be done the long does not actually get the commodity delivered. They instead get a warehouse (storage) receipt called a warrant.
If they don’t have the money to complete the purchase the warrant will be re-tendered for a fee that I have seen stated as ranging from $100-$500 per contract. The warrant is re-tendered to someone who actually does want the underlying.
That’s what normally happens as I understand it. Whether this price action implies that even this process breaks down I have no idea.
Interesting, thanks. It seems certain this scenario will happen, but it sounds like the situation is so unusual that no one quite knows how it will be dealt with when it does.
They have to pay for the oil at the predetermined contract price. They bought the oil on a specified future date when they signed this contract. They were assuming they could “sell” this oil before the contract expired, which is how they “roll” from one contract to another. However – they can’t sell it so now they have to deliver the cold, hard cash to the party on the other side of the contract. That’s why they are trying to roll the contract at a negative price.
Sounds to me that a speculator of paper contract got stuck with the black goo without storage volume! No wonder it is negatively priced.
Will they be forced to spill or burn it?
Arab Spring.2 coming?
Throw that straw on the camel’s back.
There is no camel.
MERS…poor creature 🙁
Not in Syria.
“I panned that idea on April 15 in The Art of a Failed Oil Deal.”
Right on, Mish!
Right. So how successful have the lockdowns been in places like new york compared to Sweden again. What was that about the cure being more deadly than the virus. Well we are just about to find out.
Mortimer and Randolph are smiling somewhere.
WOW.
That will leave a mark.
Somewhere.
The high yield bond market.
Here comes Moody’s.
That right there is a shit stain.