Speculation, Hopes, Tweets, & Wishful Thinking: Negative Oil Prices Explained

How can a barrel of oil be worth less than zero? On April 20, the price of a barrel of West Texas Intermediate fell below -$40 a barrel briefly, sending shock waves through the industry and leading to a 600 point drop on Wall Street. The idea that oil could be less than worthless — that you would actually have to pay someone to take it off your hands — came as a nasty surprise to lots of people.

Strategic Petroleum Reserve (SPR) sites, courtesy US DOE.

How could such a thing happen? A little thing called the futures market is responsible. All sorts of commodities — from soybeans to pork bellies to oil — are the subject of futures trading. In fact, buying and selling such contracts is essential to the orderly operation of markets for those commodities.

A farmer getting ready to plant corn in May can plan how much to invest in seed and fertilizer because the price of corn in September has already been set by the futures market. A company in the business of drilling for oil can have some idea how much that oil will be worth and make a rational decision whether the cost of production will allow it to make a profit because the price of oil at some point in the future has already been established.

Whether it’s chickpeas or Chechen crude, commodities markets depend on storage. If there is an oversupply of product, it can be warehoused until prices stabilize. Farmers depend on silos to store their crops if prices are low until such time as prices rise again. Without storage options, farmers can be wiped out by market variations in a single season. Oil works the same way. If there is no need for it today, put it in storage until tomorrow, or next week, or next year.

The drop in oil prices this week is the work of two factors. First, the expiration date for May futures contracts is Tuesday, April 21. Second, thanks to a global pandemic that has slashed energy consumption by up to a third, storage facilities for oil are rapidly filling up. There is literally no place to store any more of the stuff.

Our readers may recall a recent article about a federal judge who ruled that permits issued by the Corps of Engineers for the Keystone XL pipeline were invalid. That pipeline is intended to connect to other pipelines that converge at Cushing, Oklahoma. Because so much oil flows through Cushing, it has also become a storage hub. But as economist Adam Tooze points out, all the storage tanks in Cushing are now full.

Cushing, Oklahoma — known as the Pipeline Crossroads of the World — is where they ran out of oil storage capacity, triggering bizarre inversion of futures prices! pic.twitter.com/ZUs86c5CaT

— Adam Tooze (@adam_tooze) April 21, 2020

Another contributing factor is that some people who buy and sell futures contracts behave more like gamblers at a Texas Hold Em contest than responsible people. As Louise Dickson of Rystad Energy wrote in a research note to clients on Monday, “This moment is of course historical, and could not better illustrate the price-utopia that the market has been in since March, when the full scale of the oversupply problem started to become evident but the market remained oblivious. Since then traders have sent prices up and down on speculation, hopes, tweets and wishful thinking. But now reality is sinking in.” Her remarks were reported by The Washington Post.

In essence, a few cowboy investors got caught with their pants down around their ankles on Monday as the trading deadline approached and had to pay people to take the oil contracts they held off their hands. They took a bath in red ink but their losses were not indicative of the market as a whole. Nevertheless, the price of oil is still trending down today with no bottom in sight.

Between A Rock & A Hard Place

The US economy has hemorrhaged over 20 million jobs in the past month — more than at any time in history. And those are just the ones we know about — the people entitled to unemployment benefits. There are millions more who work in the so-called “shadow economy.” Many Americans work in the oil and gas industry but more than 120,000 clean energy workers have also been laid off as a result of the pandemic.

Naturally, the federal government wants to get America back to work, but it is not treating all employers equally. The hospitality industry sucked up almost all of the stimulus money available in the first economic relief bill that passed through Congress at the end of March. Now, another half trillion is about to be approved. But the Malignant Moron of Pennsylvania Avenue wants to shovel federal dollars to his friends in the oil and gas industry, too.

https://twitter.com/realDonaldTrump/status/1252591306028785667

Many of you may recall what happened to the coal industry after the same fellow promised to help them out. Could history repeat itself? Yeah, it most definitely could. Making matters worse is that Saudi Arabia has assembled a fleet of oil tankers, filled them up, and sent them off to the Gulf Coast oil refineries, according to The Washington Post. They are scheduled to arrive just as the glut of oil already in storage in the area hits its peak.

The shipment is partly a result of the agreement Dumb Donald brokered recently between the Saudis and the Russians to constrain their oil production. Apparently The Mouth That Roared agreed to an infusion of Saudi oil to get the deal done, a move he may now have cause to regret.

So instead of seizing this opportunity to drive investment in renewable energy forward, the unstable genius who knows more about epidemiology than any doctor is committing American tax dollars to prop up a dying industry that is coincidentally poisoning the environment so much that life on Earth as we know it is facing an existential crisis. How smart is that?

There is one way to stop this madness. Vote. And take someone who needs a ride to the polls with you. Our chance to save America from the ravings of a madman comes this November. Don’t let this opportunity slip through your fingers because you are too busy or you loathe all politicians. The way to make America great is to participate in democracy and the only way to do that is to exercise your constitutionally protected right to vote — while you still can.