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The negative price of crude oil shows that absurdity has become the new "normal"

Călin Rechea (Translated by Cosmin Ghidoveanu)
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The negative price of crude oil shows that absurdity has become the new "normal"
Călin Rechea (Translated by Cosmin Ghidoveanu)

A negative price is an economic aberration, especially when it comes to one of the most important commodities and energy resources on a global level, just as negative interest is also an economic aberration.

If the aberration called negative interest rates has become "normal" over the last few years, amid the "wise" actions of the central banks, the surrealistic landscape of the world economy has just been enhanced by negative prices for WTI (West Texas Intermediate) oil.

Quotes for oil futures for the nearest delivery month (author's note: may 2020 in this case) have entered freefall amid the nearing of the maturity, which was yesterday.

An initial decline of over 30% was extraordinary, but it was quickly forgotten as very quickly it went all the way to 99%, and then to over -300%, meaning a price deep into negative territory, past -37 dollars a barrel.

In a note reported by Zerohedge, Roger Diwan also explained how the price of WTI oil became negative.

"The phenomenon occurs when a futures contract for a physical product has no buyers at maturity or close to it", IHS Markit vice-president writes.

What does it mean? In the case of WTI oil, the delivery point is the giant warehouses of Cushing, Oklahoma, and t hose who hold futures contracts will be delivered the specified oil volume.

Unfortunately, in today's hyper-financialized landscape, such deliveries are more the exception than the norm. Roger Diwan says that "physical deliveries of crude are very rare".

Under these circumstances, "the last days of a trading cycle for futures contracts is marked by the transfer of positions to the next contract", but this time the situation has been different. Traders or speculators have failed to resell their contracts and had no storage space available in the warehouses of Cushing.

The Energy Information Administration (EIA) recently began publishing information concerning oil stocks and the actual storage capacity of the US.

According to the latest data, since April 10th, 2020, the quantity of oil stored in Cushing increased 57.6% since January 17th, 2020 and reached 54.96 million barrels, meaning 69% of the actual storage capacity. At the level of the US the stored quantity was 503.6 million barrels.

Like the vice-president of IHS Markit further stresses, "there was no price that traders or speculators could pay to get storage space, because there were no storage spaces".

In order to assuage people, Roger Diwan also says that "the shock that happened these days does not necessarily reflect the conditions on the futures markets" and gives the example of the June 2020 price, which was 21.13 dollars/barrel at the close.

Still, the official of the IHS Markit warns that "the problems concerning the June contract are far from over", as "the 15% decline in prices shows that there are major concerns when it comes to the forced shutdown of production capacities in May which were far bigger than previously announced".

Meanwhile, the price of WTI oil in futures contracts for June 2020 fell below $ 16 a barrel on the New York Mercantile Exchange (NYMEX), almost 35% below the level earlier this month.

An analysis published on Oilprice.com, which claims that "the 300% collapse in the price of oil is not as bad as it seems", indicates one of the main factors behind the fall: the massive positions held by the largest ETF fund in the USA.

United States Oil Fund LP (USO), which is traded on the NYSE, held 25% of the futures contracts with a May 2020 maturity, according to Bloomberg sources.

Buyers for these contracts were supposed to sell them by the time of expiration, or else they would be forced to take delivery of the physical oil at the end of May 2020.

"Of course an ETF like the USO is only interested in "paper barrels' and not in taking ownership of the actual oil, even if it actually had storage available for it", the analysis by Oilprice.com says, which once again shows the major problem of markets today: the massive decoupling between the financial positions and the base assets in the real economy, amid out-of-control financialization.

Aside from the fact that speculators are not interested in accepting delivery of physical oil, and that forces them to sell regardless of the price, the counterparties interested in oil delivery, such as airlines or refineries, were, simply put, not there.

Refineries are no longer accepting deliveries because demand for the end product has collapsed, and airlines with their grounded planes are more concerned with lobbying for getting aid from heavily indebted governments, while also being saddled with the massive costs of hedging contracts, which should have protected them against the rise in the price of oil.

Executive director of oil services company Schlumberger, Olivier Le Peuch, recently said that "the second quarter will probably be the most uncertain and out of control quarter the oil industry has ever seen".

In the last monthly report concerning the oil market from the International Energy Agency (IEA) it is stated that global demand will see a record annual drop in 2020, of 9.3 million barrels a day.

For April 2020, it is estimated that the drop in demand will be of 29 million barrels a day, compared to the same month of 2019, down to the level recorded in 1995, and in Q2 2020 a demand lower by 23.1 million barrels a day is expected, YOY.

In the coming days and weeks, there will probably be more news about the "victims" caught in the financial "traps" built with the help of the price of oil and we should not be surprised at all if the story of LTCM (Long-Term Capital Management) were to happen again, but on a whole bigger scale, because even trillions aren't what they once were.

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