
Biggest Oil ETF Could Go ‘Lights Out,’ Warns Wall Street Strategist - JumpCrisscross
https://www.bloomberg.com/news/articles/2020-04-21/charlie-mcelligott-worries-biggest-oil-etf-could-go-lights-out
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gen3
$UWT and $DWT were de-listed 3/19 (3x long and inverse on oil). It would still
be surprising, but I wouldn't _as_ surprised at this point. This next month
will be hard on $USO.

At this point oil stores are reaching maximum capacity, with any free space
going for a premium. I think that the squeeze at the end of the month has
shown to a lot of people that if you don't have storage room for oil, its a
liability.

Good for you if you have a ton of empty storage though!

~~~
woliveirajr
All ETFs are a kind of bet ok some real-world good. (on virtual too? Now I'm
not sure)

No bet has good/amazing returns if there's no risk. No matter how remote it
is, to be safe you sacrifice some profit. When you don't protect yourself for
those remote risks, _if_ they bite you, it hurts real bad.

~~~
gen3
Totally! My understanding of the current situation is that the market wanting
more oil has shrunk considerably. Investors were stuck with the chance of
having to actually receive the oil they had contracts on, and did all that
they could to get rid of it. This compounded and squeezed the price so low.

I'm not sure how many people planned for oil to ever go under zero. I think
that many people are going to be eyeing the current storage level (and
consumption!) and deciding that the risk (and cost) of having to settle a
shipment might not be worth it. But I don't really know ¯\\_(ツ)_/¯

~~~
debian3
Where can you see storage level?

~~~
kthejoker2
In the US, the EIA provides info on stockpiles:

[https://www.eia.gov/petroleum/supply/weekly/pdf/table1.pdf](https://www.eia.gov/petroleum/supply/weekly/pdf/table1.pdf)

But in terms of total capacity, it's tricky, because you can turn the tankers
that currently transport oil into floating stores, convert water tanks, salt
mines, and other storage media into petroleum storage, etc.

We're probably at about 60% capacity or so here in the US, we haven't even
filled up the SPR yet.

~~~
SlowRobotAhead
Help me understand. How does hitting 60% storage capacity result in negative
barrel prices? Shouldn’t that be a 99% scenario?

~~~
kthejoker2
The price of the oil is based on what someone is willing to pay for it (QED.)

Right now, nobody wants to buy the oil to actually use it.

So the only buyers are people who are willing to store it now, in order to
sell it later when the price is better.

Those people are "pricing in" their costs to store the oil in what they're
willing to pay for it on the spot market.

As storage becomes more expensive to procure (demand for it is rising, all the
"cheap hotels" are sold out, etc.), the price for oil goes down further to
cover those costs of storage for it.

Ultimately, the negative prices are a reflection that nobody wants that oil
now, and the more negative, the more a reflection that nobody is going to want
that oil for awhile.

So the price of oil at the moment is a function of time (how long no one will
want the oil) and the available supply (and therefore price) of storage for
the period of time when no one wants the oil.

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9nGQluzmnq3M
> _An exchange-traded fund has not and cannot trade below zero_

But why not, and is this baked into the contract? These aren't stocks, where
the worst case is a piece of useless paper: if there's no demand for oil,
suddenly you're holding barrels of toxic waste with real storage costs, and it
makes total sense to pay people to take them off your hands (as has already
happened with short-term oil futures).

And the interesting thing is that it's actually in the fund's best interest to
allow negative valuations, because that way they're not left holding the bag.
I see lots of interesting litigation ahead...

~~~
paxys
> if there's no demand for oil, suddenly you're holding barrels of toxic waste
> with real storage costs

Thing is ETFs like USO are created specifically to _not_ take physical
delivery of the oil. It wouldn't hold any May expiring contracts by design,
and is already shifting out its June contracts. If suddenly every single
contract for July, August and beyond went negative, and the fund didn't have
enough cash to weather it, it would declare bankruptcy. That doesn't actually
need this specific situation to happen. For example buying a contract at $100
and selling at $50 would have the same net effect for the fund as buying at
$20 and selling at -$30.

There is no additional liability for the investors beyond the piece of paper
they are holding (which is _not_ a contract for oil delivery) becoming
worthless, which is why zero is the hard floor.

~~~
throwaway894345
What does that paper represent if not a contract for oil delivery? Presumably
there's some real world oil backing it, and if so, where does that oil go?

~~~
chapplap
The piece of paper a USO investor holds is shares in the fund. The fund itself
holds the futures that are contracts for oil delivery. Limited liability
protects the fund's shareholders.

~~~
throwaway894345
So if the fund declares bankruptcy, who has to deal with the oil?

~~~
manigandham
The contracts will be liquidated first, if possible. If the fund is still left
holding some then the exchange and market makers will absorb the losses with
their excess capital and insurance policies.

It takes special clearance to even trade contracts that are physically
settled. Most of the time these contracts are just cash-settled instead.

------
gruez
On a tangential note:
[https://robintrack.net/symbol/USO](https://robintrack.net/symbol/USO)

Looks like the main losers are going to be retail investors.

~~~
GlennS
So, what's actually going on in this chart? Are people mass buying this fund
as its price drops and hoping for a rebound?

~~~
almost_usual
Right. It's also a signal that retail investors don't have much of an impact
on anything.

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anonu
If you're the USO fund manager right now you are sweating bullets.

There is a massive liability mismatch here. The fund could go negative and
leave the fund management company with a massive hole in its pocket and cause
it to go bankrupt. I would be worried about all the other ETFs managed by USCF
- as they have a high probability of going lights out as well.

On the other hand, investors in USO, no matter their losses, are floored at
$0.

Only took an 8-standard deviation event (aka pandemic) for the unthinkable to
happen.

~~~
malandrew
If they were smart, they have one corporation per fund to shield liabilities.

~~~
anonu
It depends. ETFs are held in a trust. Usually it's not one etf per trust.

------
sand_castles
We are watching large energy companies consolidating US production like other
regions in the world ( Mexico, KSA, Iran, RUS ).

The frackers were causing problems in the global oil market.

New technologies normally get consolidated by the larger monopolies over time.

The only way to do it is to bankrupt the smaller players.

~~~
dehrmann
Consolidation involves mergers, not bankruptcies. I agree that frackers were
causing problems for the oil market, but this isn't consolidation, it's OPEC
trying to drive the frackers of of business, maybe even make the US a net
importer again and regain some political clout.

~~~
sand_castles
You Americans think everything revolves around you.

China is the largest crude oil importer, soon to be the largest total
consumer, OPEC cares much more what happens in the East, Europe and partially
US.

Covid-19 and the economic crash is a wet dream for the major powers.

\- CCP rounded up all the people in HK.

\- KSA gets to consolidate market share, steal from middle class through the
Aramco IPO.

\- British people stopped talking about Brexit.

\- Energy cartel in NA continue to vertically integrate after "startup" did
their innovation.

Remember that OPEC was Kissinger's idea.

------
smabie
Somewhat tangential question: why can't oil producers "buy" these negative
contracts and pump the oil back into their wells?

~~~
paxys
> pump the oil back into their wells

That's...not how oil wells work.

~~~
yaitsyaboi
Or just not extract them?

~~~
ajflores1604
Its V expensive to start and stop production. And there's some tragedy of the
commons at play here too. Lots of Texas oil producers are heavily leveraged
with debt. With lower prices they have to pump more to meet any obligations
they have.

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juped
If ETFs get too low (as they often do), they generally do a reverse split. The
objective of the fund managers is to track percentage moves - that's all.

~~~
partiallypro
USO is doing a 8-1 reverse split next week.

------
teruakohatu
Can someone explain to an newbie like me why supply has not matched demand? Is
this the result of contacts to buy oil that predated the price crash?

~~~
Analemma_
The Saudis launched a price war just as the coronavirus struck and ramped up
production to try and squeeze Russia and/or American shale producers
(depending on who you ask). Like most people, they had no idea how hard the
virus was going to tank demand and so we ended up with a huge oversupply.
Supposedly Trump brokered a deal to get everyone to cut production, but that
doesn’t kick in until May 1st.

------
xs
I just wonder, what % chance is there of lights out? Because if it's only a
30% chance that that'll happen, then doesn't that mean a 70% chance of it
coming back up, quadrupling in price in the next year?

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whytai
Seeing that the OPEC production cuts don't go into effect until the 1st, what
would actually happen to this oil if nobody could legally buy it due to lack
of storage?

~~~
asdfasgasdgasdg
Physically? Eventually all the containers would be full, then the pipelines
would back up, then the ships would be full and lack any place to unload, then
the loading terminals at oil producing countries would be full, then their
pipelines would be full, then finally any buffer at the well head would be
full, and ultimately the well owners would be forced to stop pumping or else
place the oil somewhere other than into the system (on the ground or into the
sky by burning it).

~~~
elliekelly
Any idea how quickly a well can “stop pumping”? Is it as easy as the push of a
button (I kind of doubt it) or as complex as needing a week or longer?

~~~
ars
Depends on the kind of well. Most of them can stop and start easily enough.

But some, once you stop them, they won't start back up again, and will be
abandoned. (The oil will harden, and there's no way to heat it back up.)

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naveen99
Unfortunately with tdameritrade halting trading on oil futures, there are
fewer options for retail investors to bet on oil at the moment.

