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Still_Small_Voice

Price of Oil Drops Below Zero Per Barrel

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By Jonathan Garber-- FOXBusiness -- April 21st 2020

U.S. equity markets fell sharply Tuesday as sliding oil prices weighed on investor sentiment and the Senate prepared to extend more relief for small businesses after a stalemate that left some owners facing ruin.

The Dow Jones Industrial Average tumbled 387 points, or 1.6 percent, in the opening minutes of trading. The S&P 500 and Nasdaq Composite each dropped by the same percentage.

The early selling comes as West Texas Intermediate crude oil remained under pressure after a historic selloff pushed prices into negative territory for the May contract, which expires on Tuesday. The June contract, the most active, plunged 28 percent to $14.66 a barrel on Tuesday after falling as much as 42 percent in overnight trading.

The epic selloff in oil continues to weigh on oil majors Exxon Mobil and Chevron, which were two of the three biggest Dow decliners on Monday. Other oil companies such as Hess Corp. and Phillips 66 were also in the crosshairs.

Read more at: https://www.foxbusiness.com/markets/us-stocks-april-21-2020

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I doubt I will ever see this in my life again. The price of oil per barrel went negative yesterday.  They are paying people to take barrels of oil because no one wants it!  It is a huge oversupply of oil in the markets right now.  That is unbelievable to me.

Back in 2008 the price of oil soared to about $145 per barrel and now they are paying people to take barrels of oil off their hands.

Edit:  And the cheapest I can find gasoline for around me is $2.06 per gallon.

Edited by Still_Small_Voice

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6 minutes ago, Still_Small_Voice said:

I doubt I will ever see this in my life again. The price of oil per barrel went negative yesterday.  They are paying people to take barrels of oil because no one wants it!  It is a huge oversupply of oil in the markets right now.  That is unbelievable to me.

Back in 2008 the price of oil soared to about $145 per barrel and now they are paying people to take barrels of oil off their hands.

Edit:  And the cheapest I can find gasoline for around me is $2.06 per gallon.

It's a 1.34 where I live. With my grocery store points I actually paid 66 cents a gallon the other day. The lowest I had ever seen gas in my life, when I was a young child, was 1.00 a gallon. While I love cheap gas I am concerned about the economic fallout this will cause.

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48 minutes ago, Still_Small_Voice said:

I doubt I will ever see this in my life again. The price of oil per barrel went negative yesterday.

I think it's a historic first. We were unlikely ever to see this day. But it's a market fluctuation, albeit extreme. This too shall pass.

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My understanding is that the price went negative because storage facilities are near capacity. It goes something like

  • Company A placed an order for a barrel of crude oil March to be delivered in April. 
  • Shelter in place orders take effect, demand for crude oil plummets
  • Company A reduces refining. Storage capacity for crude oil is above expectation.
  • That barrel of crude oil ordered in March finally arrives in April. Company A is at 100% storage capacity.
  • Company A must either store the crude oil, or pay someone to store it for them

So the negative price reflects the going rate to pay someone else to store that barrel of crude oil for you.

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4 minutes ago, MarginOfError said:

My understanding is that the price went negative because storage facilities are near capacity. It goes something like

  • Company A placed an order for a barrel of crude oil March to be delivered in April. 
  • Shelter in place orders take effect, demand for crude oil plummets
  • Company A reduces refining. Storage capacity for crude oil is above expectation.
  • That barrel of crude oil ordered in March finally arrives in April. Company A is at 100% storage capacity.
  • Company A must either store the crude oil, or pay someone to store it for them

So the negative price reflects the going rate to pay someone else to store that barrel of crude oil for you.

This seems wrong, conflating sales with warehouse storage. I might pay a storage place to store my stuff, and that costs me money. But that doesn't mean I'm paying other people money to cart off my stuff. Storage is a different matter from sales.

Of course, you may be right. On this topic, I don't pretend to know what I'm talking about. But the idea that paying someone to store oil for you is the same as paying someone to take oil from you just doesn't compute.

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I think MOE's math works, if it's a situation like this:

* I can pay $10,000 to store it for a month.
* I can pay $8000 for someone to take it off my hands.

 

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45 minutes ago, Vort said:

This seems wrong, conflating sales with warehouse storage. I might pay a storage place to store my stuff, and that costs me money. But that doesn't mean I'm paying other people money to cart off my stuff. Storage is a different matter from sales.

Of course, you may be right. On this topic, I don't pretend to know what I'm talking about. But the idea that paying someone to store oil for you is the same as paying someone to take oil from you just doesn't compute.

I might be too specific on the details, but I think the general concept is sound. Oil companies aren't able to store all of their supply and are having to pay people to take away the excess. That gets reflected in the stock price as a negative value.

Probably a better description here: https://money.stackexchange.com/questions/124269/what-does-it-mean-for-the-price-of-oil-to-be-negative

 

As far as the difference between paying someone to store or paying someone to take it away, I would imagine that in many cases, the people taking the oil away are planning to store it until the price of oil goes back up, at which point they may sell it back to oil companies.  So, I may get paid $37 per barrel to take it away from Company A.  I sit on it for six months, and when oil is back up to $50 per barrel, I sell it to Company A for $40 per barrel.  I've made $77 per barrel, minus my storage costs.

Yeah, what's happening right now is a little bizarre.

Edited by MarginOfError

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57 minutes ago, Vort said:

This seems wrong, conflating sales with warehouse storage. I might pay a storage place to store my stuff, and that costs me money. But that doesn't mean I'm paying other people money to cart off my stuff. Storage is a different matter from sales.

Of course, you may be right. On this topic, I don't pretend to know what I'm talking about. But the idea that paying someone to store oil for you is the same as paying someone to take oil from you just doesn't compute.

That's not really how it works.  Oil (commodity) works through futures contract.  Basically, some investor buys the contract for May delivery.  That investor doesn't own a pint of storage because normally, the oil is guzzled before the contract ends.  A lot of people go long on their futures - even up to 6 months.  Well, 6 months ago, there was no covid and the price of oil was at a low $33 per barrel.  So investors stocked up on contracts from anywhere between January-May delivery.  Well... March came and everybody stayed home.  So, these investors with contracts fulfilled in March are getting very low demand... hence the commodity went down down down.  Trump sucked up as much as he can to replenish the national reserves (not sure if this happened because I didn't pay attention enough to know if he got the money from Pelosi - she's been more of a douchebag than normal lately).  So May contracts sales closed yesterday (or was it today) at negative price because... they still have all the supply from the past months left unconsumed so contracts remain unfulfilled (you still have to pay your contract even if you can't sell it).  June contracts are currently at $23 and July at $33.  Last December was $33, so it's still not bad enough to wipe out American oil.

But, I wouldn't be surprised if Trump decides, just like he closed down immigration, we're going to close down foreign import of oil for the next few months to keep American oil stable.

Edited by anatess2

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7 minutes ago, MarginOfError said:

I might be too specific on the details, but I think the general concept is sound. Oil companies aren't able to store all of their supply and are having to pay people to take away the excess. That gets reflected in the stock price as a negative value.

Probably a better description here: https://money.stackexchange.com/questions/124269/what-does-it-mean-for-the-price-of-oil-to-be-negative

Very interesting. I guess I just don't understand commodities futures. I'm thinking in terms of stock trading derivatives such as the call option, which is the expirable right (but not obligation) to buy a given stock at a set price. Apparently, the commodities futures market such as pork bellies and oil is not just a virtual transaction of unspecified goods, but a contract to take actual physical possession of the contents of a railroad car or storage tank full of whatever commodity you're getting.

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7 minutes ago, Vort said:

Very interesting. I guess I just don't understand commodities futures. I'm thinking in terms of stock trading derivatives such as the call option, which is the expirable right (but not obligation) to buy a given stock at a set price. Apparently, the commodities futures market such as pork bellies and oil is not just a virtual transaction of unspecified goods, but a contract to take actual physical possession of the contents of a railroad car or storage tank full of whatever commodity you're getting.

They don't have to deliver it.  But you still have to pay for it.  You can't change the end date of your contract to deliver it at a different date other than contracted.  You buy another contract. 

In any case, most contracts are not fulfilled - either too much demand or too much supply.  Of course, not as a giant gap as it is now.  So, usually, contracts goes to options or margins.

Edited by anatess2

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These folks seem to have their heads mostly screwed on, and explain it well:

https://fintrend.com/2020/04/21/how-can-oil-be-worth-less-than-nothing/

Plus, they have relevant charts to help with context.

Crude-Oil-Below-Zero.png

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People are buying less gas because they aren't travelling as much.

Other industries aren't using as much because the products they make aren't being sold or the plants are closed down.

Thus, suddenly where there was a huge demand, there is suddenly a lot less of a demand.

It's not just oil, but that's what is making the headlines right now.

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2 hours ago, NeuroTypical said:

These folks seem to have their heads mostly screwed on, and explain it well:

https://fintrend.com/2020/04/21/how-can-oil-be-worth-less-than-nothing/

Plus, they have relevant charts to help with context.

Crude-Oil-Below-Zero.png

Is there a graph (hopefully adjusted for inflation) of the OPEC crisis in the 70's/80's?

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