Today’s EIA report is interesting. Cushing weekly ending stocks were high, but still 10 million bbl below their all-time high. But the report suggests there is a lot of pre-committed storage space, presumably because production isn’t slowing down fast enough. 
They agree with my view that the “negative spot price” is more or less a myth.
Futures traders and spot traders are fundamentally different. Someone who has oil to sell on the spot market is already plugged into the world of physical oil. They’re not going to suddenly realize they have oil that they need to store and nowhere to store it.
So what happened to the futures market? If the futures price gets too low relative to the spot price, a canny spot trader should be able to arbitrage this by buying the future for cheap and possibly reserving storage in case they can’t find a buyer before delivery.
They will especially want to reserve storage if they know that demand is artificially low now (due to the pandemic) but is likely to return in the not-too-distant future. So for a while, these arbitrageurs were able to maintain a bid on the May.
But at some point, they started having trouble reserving storage. If we could put a plot of May prices next to plots of storage prices and available storage in Cushing, we would probably be enlightened. Unfortunately, the latter two charts only exist in our imaginations.
Rather than a refutation of efficient markets as some suggest, Monday’s crash is a beautiful demonstration of price discovery at work. Nobody knows exactly how much storage is available in Cushing, OK, and only a select few have an up-to-the-minute handle on how much it costs.
But those select few, because of their important role in the market, were able to disseminate that information to the rest of the world through their gradual withdrawal from the May bid. Rather than exposing a fatal flaw of capitalism, this was one more tale of markets working.
Or at least, that’s how it works in my imagination.
@threadreaderapp unroll
