What happened today in oil markets?
The monthly oil contract expired. So normally, folks who trade contracts like so many 1s and 0s on a computer screen would offload their contracts to physical buyers.
End of month, someone needs to take physical delivery, right?
1/
The monthly oil contract expired. So normally, folks who trade contracts like so many 1s and 0s on a computer screen would offload their contracts to physical buyers.
End of month, someone needs to take physical delivery, right?
1/
Except, the physical buyers were MIA. Makes some sense. No one is buying much refined petroleum products (aka: gasoline, jet fuel) so refineries don't need to buy crude and physical buyers don't want to own barrels.
In a market w/ sellers and no/few buyers, prices fall...
2/
In a market w/ sellers and no/few buyers, prices fall...
2/
That happened this afternoon. You could sense the energy traders panicking as their front-month contracts came close to expiring.
"I don't want to take delivery of any oil. I'm going to sell."
So $20 became $10, then $5, then 17 cents ... and then prices went negative.
3/
"I don't want to take delivery of any oil. I'm going to sell."
So $20 became $10, then $5, then 17 cents ... and then prices went negative.
3/
Energy trader: I will pay you to take my oil contract so I don't have to take physical delivery.
Physical trader: Maybe. How about you pay me $35 for every barrel I take off your hands.
4/
Physical trader: Maybe. How about you pay me $35 for every barrel I take off your hands.
4/
Bottom line. The demand shock is very real. Storage is practically nonexistent (otherwise, why not buy at $5, hold for a month and resell at $20?)
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