Well done to The Guardian, oh, well done indeed

2. What do ‘negative prices’ mean?

In short: oil producers are paying buyers to take the barrels of oil off their hands because storage facilities are full to the brim. At the market’s lowest point on Monday, an oil company might have paid about $40 for every barrel of oil someone was willing to take. A buyer would need to factor in the cost of transporting oil from the well to a shipping port, or a storage facility, where it may need to be held for up to six months, at significant cost. They would also need to bet that oil prices will rise later this year to make a return on the “investment”. No oil company wants to “sell” their crude at a loss, so many producers are likely to shut their wells until the market recovers.

It’s the futures price, for May delivery, which has gone negative. Not the spot or physical price.

Sigh.

8 thoughts on “Well done to The Guardian, oh, well done indeed”

  1. Well the price is the aggregate of everyone’s expectation, innit. So either people who bought at minus 40 dollars will make a killing as the spot price will be above zero when the contracts mature, or some speculators are going to have to take physical delivery.

    So it’s some kind of speculation-driven overshoot, just like happened in the run up to 2008.*

    *: Yes, I know speculators are always right about prices and it’s zero sum so has no influence at all on prices, ever, and they all do us such a huge favour by providing price information by not ever moving prices.

  2. I know it’s difficult to resist a rant on a topic you don’t understand very well, BiG, but how would you expect prices to behave when demand is decreasing and supply is increasing in an industry where it is complicated just to switch off production?

  3. ‘No oil company wants to “sell” their crude at a loss, so many producers are likely to shut their wells until the market recovers.’

    If producers can turn off the pumps, what’s all this chatter about? If demand doesn’t match supply, supply will be reduced. Duh.

  4. Bloke in North Dorset

    Just heard something that caused some wry amusement. By signing up to the Feds buying distressed corporate bonds the Dems have bailed out the fracking industry.

    I’d love to see the faces on Warren and The Gang when they realise.

  5. Shutting off the pumps completely isn’t really an option for most producers. What counts, if you are buying oil, is to have storage. I think the Houston tanks are full. If you have a large tank you can make a killing

  6. Except it seems that oil was still being sold at positive prices even as the expiring future was deeply negative.

    I don’t understand how speculation helps price discovery by getting prices so manifestly wrong.

  7. Go to the Streetwise Professors blog for a more complete explanation of what likely happened.
    As usual, the MSM don’t have a scooby about what they write about.

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