Monday, April 20, 2020

Brother, can you spare a barrel?


This morning the early chatter in the market was talk about a slight weakening of the May Futures contract for oil.  When I first noted it to a friend, it was down 20% in the first few hours of trading.  A huge decline but in today's markets it was shrugged off. 

By noon, that decline was 50%

By 1pm the decline was 95%!

Okay, at that point what can you lose right? If something goes from $20 to $0 you lose 100%.  Ah, but oil futures are a funny animal.

I once worked with one of the most successful oil traders on Wall Street.  He told me that on his first year on the job he missed a position and was required to take delivery of something like 100,000 barrels of oil. 

Back to today - Someone (I suspect we'll find out who in the coming weeks) came into the end of the contract trading window with a position that would normally just get rolled to June.  However, there were suddenly no buyers for the May contracts.  Okay, well, in the worst case scenario like my friend mentioned above, you can take delivery of oil, store it and then sell it later. 

Unless, EVERY AVAILABLE STORAGE SPACE IS FULL.  The shutdown of the economy had dramatically cut demand for oil.  Oil companies only know how to do one thing - pump oil - so I've been watching storage tanks fill around the US and I was a little worried but you assume they'll find storage somewhere.  Unless, they can't when you can't find normal storage you have to pay a huge premium for odd storage (tankers, ships, railcars).

The May contract was basically illiquid only trading a few contracts among computers but that didn't stop the price decline. It fell to $0.00 and kept falling, -$5.00, -$7.00, -$12.50, -$20.00 finally settling at -$37. Down over 300% for the day and implying that if you took delivery, you would be PAID $37/barrel of oil.  Agree to take a million barrels of oil and collect $37 million.  Now you have to figure out where to put 42 million gallons of oil, but I just gave them my home address as 1600 Pennsylvania Avenue Washington DC.

Again, this was a market fluke as the June contract represents a more accurate oil price of $21. However, the June contract might have the same problem if storage facilities remain filled to the brim.

So, while it makes for a historic day of trading and some poor traders probably lost their jobs today but it's not like gas prices are going negative.

Speaking of gas prices - has anyone noticed how sticky they are in NNY?  The price of oil is down 50% over the past 6 months and gas prices have barely budged. I'll go into the reasons why in another post sometime.

Talking about oil raises some good questions about the rest of the commodity complex.  In food products - Corn, Soybeans, and Sugar have already fallen about 30% but they all look like the could fall another 50-60%.  Imagine the repercussions through the economy if farmers are facing payouts at 30% of what they were expecting just 3 months ago.  Bankruptcies will be rampant, but it's an election year so I'm sure there will be more bailouts.
Quote of the Day
via @NorthmanTrader
"We've known the vast majority of Americans have been living paycheck to paycheck.

Now we find many businesses have in essence done the same.

Few reserves, no ability to sustain themselves without bailouts after just a few weeks.

What will all this look like on the other side?"
Daily Dose of Humor

via @mom_tho
Things my kids will sleep through: fireworks, thunderstorms

Things that wake my kids up: my eyelids closing

via @katewouldhaveit
Recipe for Hard-Boiled Eggs:
1. Gently place eggs in water and bring to a mild boil
2. Let boil until you remember you left something on the stove (12-54 minutes)

via @momjeansplease
My ideal date: we order food, I eat mine and yours. you are impressed and order me more.

Cheers and stop trading oil futures with your $1200 stimulus check!

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