
US oil prices turn negative as demand dries up - DarkContinent
https://www.bbc.com/news/business-52350082
======
dntbnmpls
dupe.

[https://news.ycombinator.com/item?id=22923025](https://news.ycombinator.com/item?id=22923025)

------
propter_hoc
So they start off the article with this statement:

"That means oil producers are paying buyers to take the commodity off their
hands over fears that storage capacity could run out in May."

This statement is actually totally false. Producers already got paid for this
production a long time ago when they initially sold the futures contract. What
has actually happened is that as the expiry of the May futures contracts
arrives, the traders who bought those contracts are now trying to unload them
at all costs. This is because if they're stuck holding the contract at expiry,
they have to take physical delivery (each futures contract represents 1000
barrels of oil), and the cost of storing that oil is getting really high since
the storage facilities are nearly full.

Later they kind of explain this in the article:

"The severe drop on Monday was driven in part by a technicality of the global
oil market. Oil is traded on its future price and May futures contracts are
due to expire on Tuesday. Traders were keen to offload those holdings to avoid
having to take delivery of the oil and incur storage costs."

But I think it's pretty irresponsible journalism to kick off the article the
way they did, and imply that producers are paying you to take their oil today.

~~~
User23
> cost of storing that oil is getting really high

If anything, this is a wild understatement. Each contract represents 1000
barrels of toxic waste. You can't just have that stored in a shed or
something. And all the commercial regulation compliant storage is gone. I'd be
willing to bet you will have a hard time even finding a tanker truck to take
it to a buyer, since the tanker owners themselves are going to be using those
trailers as temporary storage facilities. Anyone stuck taking delivery of
barrels right now is in for a world of hurt. The legal fees alone are going to
be ruinous.

~~~
jliptzin
Forgive me if this is a stupid question but they can’t hold a gun to your head
to force you to take the oil, right? Can’t you just refuse the delivery if you
have nowhere to store it? Is there language in the contract for this kind of
situation?

~~~
User23
That's not a stupid question it's an excellent one. If you don't take delivery
you're in breach of contract. The penalties for that are going to depend on
how the judicial process works out.

This has never happened before, so I don't know how it will play out other
than that it's going to be wildly messy. Probably far messier than anyone,
myself included, is imagining.

~~~
markdown
At the risk of sounding stupid, I have to ask...

Would it be possible to simply pump the oil back into the ground wherever the
closest oil field is?

~~~
baud147258
Doesn't the oil just come out of the oil well from its own pressure? Which
would make pumping oil back in the oil field complicated

~~~
CydeWeys
There's lots of empty oil fields out there though. Many of them could
hopefully be refilled just using gravity?

~~~
tomc1985
The US Strategic Petroleum Reserve is stored underground, surely they could
build a similar reservoir

~~~
koolba
You could. Though it’d cost billions of dollars and would not be done by the
time the contracts expire and deliver needs to be taken.

------
maxehnert
Since oil is making the front page here, if you're interested in the history
of American oil industry, "The History of the Standard Oil Company" by Ida
Tarbell is a fantastic read. It's also a great example of investigative
journalism.

In early chapters of the book she covers the initial rush to pump oil in the
Oil Regions and the history of pipelines and storage facilities as it all ties
into business practices of Rockefeller.

Oil storage facilities were an interesting startup idea back then, in the
beginning producers would pump the oil into open pits where it would seep back
into the ground if it wasn't transferred fast enough, then of course new ways
of storing and transporting the oil were experimented with. It also goes into
how much supply/demand were at odds in the beginning leading to several
collapses in the price of oil when there wasn't such a diverse market. Again
some of the issues we still see where land locked areas of producers struggled
to get their product out of the region and how local economies caused drastic
prices differences that we're seeing right now.

[https://en.wikipedia.org/wiki/The_History_of_the_Standard_Oi...](https://en.wikipedia.org/wiki/The_History_of_the_Standard_Oil_Company)

~~~
new_time
Ida Tarbell's father was an oilman who was ruined by Rockefeller and Standard
Oil while she was a girl, which is important to keep in mind when
contextualizing her work. She lived her life in part as a crusade against
Standard Oil and Rockefeller. Obviously she was heavily biased, this being
instilled in her early on.

For a less biased look at the history of the American oil industry by way of
Rockefeller and Standard Oil, I strongly recommend Titan by Ron Chernow -
author of Hamilton - which is an excellent account of Rockefeller and Standard
Oil, both the good and the bad.

------
fennecfoxen
More specifically, West Texas Intermediate Crude futures for early May
delivery are sub-zero. Late-May delivery is more expensive.

This is in part a reflection of the fact that the oil producers have already
been paid for the output and are contractually obligated to deliver it, but no
one actually really has a use for it once it is there, and it will cost money
to transport or store it.

~~~
nshepperd
It can't just be producers being contractually obligated to deliver it, can
it? If that was the case, couldn't they close out their obligation by buying
back some of these futures (at a profit), and "delivering" it to themselves by
reducing production? So it must be that reducing production itself is not
possible or too expensive for this to make sense.

------
csense
If you owned an oil ship, what stops you from getting paid $25 a barrel to
fill your ship up with oil, sailing to international waters, dumping it all in
the sea, then go right back to port and do it again and again getting paid $25
a barrel each time?

~~~
bouncycastle
These are only the prices of the "futures contracts". i.e. oil that hasn't
been produced yet, as far as I understand. Actual physical oil still has a
price > 0\. (Spot price)

Here is a page that includes some spot prices [https://oilprice.com/oil-price-
charts](https://oilprice.com/oil-price-charts)

------
dchest
Matt Levine's explainer
[https://www.bloomberg.com/opinion/articles/2020-04-20/there-...](https://www.bloomberg.com/opinion/articles/2020-04-20/there-
s-nowhere-to-put-the-oil)

------
aazaa
Although this is largely a paper phenomenon, the thing to pay attention to now
is ripple effects.

A few weeks ago, Capital One was granted a regulatory waiver from the CFTC
over its oil derivatives positions - a waiver it since declined to use:

> The registration is related to Capital One’s commercial lending to the oil
> and gas industry, a relatively small part of its overall business. The bank
> enters into commodity swaps with energy clients to help them mitigate the
> risk of energy price swings and the related borrowing risks.

[https://www.reuters.com/article/us-health-coronavirus-
capita...](https://www.reuters.com/article/us-health-coronavirus-capitalone-
cftc/capital-one-says-it-wont-use-cftc-waiver-related-to-oil-lending-
idUSKBN21M0TS)

Most people don't immediately think of Cap One as an oil futures player. But
its lending business caused it to enter the market to hedge some of its loan
portfolio.

Given the highly unusual nature of what happened today, it wouldn't be
surprising to see future announcements of banks or other financial
institutions getting into trouble over commodities derivatives bets going
pear-shaped.

------
myth_buster
Relevant: That Time I Tried to Buy an Actual Barrel of Crude Oil

[https://www.bloomberg.com/news/articles/2015-11-03/that-
time...](https://www.bloomberg.com/news/articles/2015-11-03/that-time-i-tried-
to-buy-some-crude-oil)

------
perl4ever
In one of the articles, it quoted someone from, I think, the CME, that said
they were fully prepared in their trading systems to handle these negative
prices with no hiccups.

What I immediately thought, that I haven't seen anyone else mention yet, is
that _there_ are some admirable programmers!

~~~
vkou
As someone who worked on trading software, I'd reserve the praise for the PMs
- who would explain to the programmers why all this stuff is important.

~~~
jhwang5
Ex-trader at GS/MS here. PMs in this case are traders, requirements about
trading systems come from traders b/c they have to dog-food it. Usually there
is no separate PM in the tech world sense at banks, though there are project
managers.

------
talentedcoin
There seems to be lots of confusion on how this could have happened. Long
story short — it may be because of the USO ETF:

[https://www.forbes.com/sites/jimcollins/2020/04/20/the-us-
oi...](https://www.forbes.com/sites/jimcollins/2020/04/20/the-us-oil-etf-uso-
is-the-culprit-behind-oils-massive-plunge/)

------
new_time
Futures prices are significantly higher than $0. This is less noteworthy than
it seems.

[https://www.marketwatch.com/investing/future/crude%20oil%20-...](https://www.marketwatch.com/investing/future/crude%20oil%20-%20electronic)

~~~
JshWright
Just because the situation is complex doesn't mean it isn't newsworthy. This
is certainly an unprecedented and significant event.

~~~
dmix
It still appears more significant by the way futures trading works and the way
it all bulked up to the last trading day, since there was no buyers after a
certain point - because (certain) buyers were incentivized to wait until the
last minute to submit orders, to get the cheapest price.

In a "real" market with physical oil wells + storage, wouldn't that decline in
consumption -> storage normally happen far more gradually over time? (A drop
over a week is less exciting than a down spike within 24hrs) I know it's less
efficient that way and all of that, but this seems to make it appear like this
drop in the market happened all at once.

A lot of non-experts will see the news this way regardless - it's _slightly_
less exciting in context but still historic.

------
zw123456
Could you just take it and they pay you to take it and dump it into dry wells
in Texas and Oklahoma, seems like a reasonable gamble ?

Shrug....

~~~
comicjk
Oil deposits are permeable rock with a mix of oil and water in the pores.
Pumping oil down into such a formation would be slow and expensive. It would
also take different equipment from that which is there at the wellheads now,
so you couldn't get started right away.

------
anonu
It should really be "US WTI front month futures negative for the first time"

There's a big distinction between that and "oil prices"

------
generalpass
So, where are all the arguments now about why speculators should be required
take delivery? I mean, really, the oil producers got paid and consumers shall
have copious supplies of oil.

Nobody out looking to find excuses to further regulate commodities markets
when all the traders are losing their asses.

------
saadalem
Oil costs $ to store. Due to the economic collapse, oil isn't being used much.
So all the storage facilities are filled up. So nobody who can store it will
buy it from you. If you want to get rid of oil, you have to pay someone.

------
Vomzor
How long would it take to build new storage tanks?

~~~
fennecfoxen
With regulatory approvals? Probably years.

The smart equivalent is to get a tanker ship and just float it out at sea
until someone wants the oil (usually just west of Africa, where you can easily
dispatch it to whoever ends up needing it.) Not sure if it works quite as well
with WTI instead of Brent crude, though.

~~~
core-questions
It is probably a fair and terrible assumption that others have thought of this
already and that, in fact, tanker ships are filling up all over the place
right now. Statistically, this means we're more likely for a spill, somewhere.

~~~
fennecfoxen
The Wall Street Journal writes today:

"Lease rates have soared for very large crude carriers, the 2-million-barrel
high-seas behemoths known as VLCCs. The average day rate for a VLCC on a six-
month contract is about $100,000, up from $29,000 a year ago, according to
Jefferies analyst Randy Giveans. Yearlong contracts are about $72,500 a day,
compared with $30,500 a year ago. Spot charter rates have risen sixfold, to
nearly $150,000 a day.

Day rates rise as the spread between oil-futures contracts widens. The basic
math is that every dollar in the six-month spread equates to an additional
$10,000 a day that can be paid for a VLCC over that time without wiping out
all the oil-price gains, Mr. Giveans said."

But there's plenty of Saudi oil going in as well.

I'm not sure that they're materially more at risk of a major spill than during
normal operations.

------
xyst
I might be in minority, but I think this is great for the clean energy sector
and environment. The oil is not being used and thus not being consumed and
converted into toxic products (carbon dioxide, and various other vehicle
emissions) which are leaked into the environment.

I hope these oil companies dissolve over this unprecedented event.

~~~
toomuchtodo
Lots of silver linings from COVID (oil demand destruction, air pollution
reduction, natural work from home experiment at scale).

------
mensetmanusman
It’s getting more likely that the fallout from the response will be worse than
the virus would have been.

For perspective, 800 000 people die every year in the world from suicide
alone.

Depression/anxiety/hopelessness has real consequences.

~~~
fiblye
On the other hand, there’s some potential good that could come of it. Some
people who’ve felt trapped in dead end jobs are getting new opportunities. Who
knows if the good changes that result will outweigh the bad, though.

~~~
mensetmanusman
True, it was cool to see how much solar production has spiked in Germany
because of smog reduction.

------
pcurve
anybody know how many barrels were actually sold at that price? $0 is one
thing, but I'm shocked at the minus $38. It could not have been large.

~~~
cheald
You can look up the volume:
[https://www.marketwatch.com/investing/future/cl.1/charts](https://www.marketwatch.com/investing/future/cl.1/charts)
\-- between 2:20-2:25, EST, for example, volume was 748 contracts (748,000
barrels) at -$37.11.

~~~
jliptzin
Could be short covering

~~~
kgwgk
Long covering, actually. (Here is the long who is forced to sell at a negative
price to get rid of their long position.)

------
S_A_P
There should be a meme: 75 year old baby boomer: I remember when gas was less
than a dollar a gallon 45 year old son: me too! 15 year old grandson: me
three!!

