Oil prices dip below zero as producers forced to pay to dispose of excess

Old_Joe

Following is a lightly edited news item courtesy of The Guardian, which would very much appreciate your support of their effort to accurately report worldwide news.

US oil prices turned negative for the first time on record on Monday as North America’s oil producers run out of space to store an unprecedented oversupply of crude left by the coronavirus crisis.

The price of US crude oil collapsed from $18 a barrel to -$38 in a matter of hours, forcing oil producers to pay buyers to take the glut of crude which they cannot store, as rising stockpiles of crude threaten to overwhelm oil storage facilities.

The Guardian reported over the weekend that a record 160m barrels of oil was being stored in “supergiant” oil tankers outside the world’s largest shipping ports, including the US Gulf, following the deepest fall in oil demand in 25 years because of the coronavirus pandemic.

The last time floating storage reached levels close to this was in the depths of the financial crisis in 2009, when traders stored more than 100m barrels at sea before offloading stocks when the economy began to recover.

The price collapse in US oil market - known in the industry as the West Texas Intermediate price - accelerated because it is the last day oil producers can trade barrels that are scheduled for delivery next month, when oil storage is expected to reach capacity.

The US price for oil delivered in June, which will become the default oil price from tomorrow, is also falling due to the economic gloom caused by the coronavirus, but has managed to remain above $20 a barrel. On Monday the price for brent crude, the most widely used benchmark, fell 8% to $25.79.

Concerns over the economy, which directly affect oil demand, have been heightened by the growing standoff between the US president and state governors over whether the US can begin to lift restrictions on movement and businesses.

Global oil prices are expected to begin recovering over the second half of the year as tight restrictions on travel to help curb the spread of the virus are lifted, raising demand for fuels and oil.

The world’s largest oil-producing nations have agreed a deal to hold back between 10m to 20m barrels of oil a day from the global market from May, and many oil companies are likely to shut their wells as financial pressures mount.

Cailin Birch, global economist at the Economist Intelligence Unit, said: “US crude oil production has begun to fall in the last two weeks, and will continue to fall in the coming months as already heavily indebted shale firms scale back activity or are forced into bankruptcy or consolidation.”

Despite the historic production cuts, most analysts believe that oil prices will fail to reach the same price levels recorded at the beginning of the year before the outbreak. The global oil price, under the Brent crude measure, reached highs of almost $69 a barrel in January before plummeting to less than $23 a barrel at the end of March.

Comment: It would seem only logical that we should now expect to be paid by the oil companies for helping them use this unwanted oil. It will be appreciated if you could let us know how that works out in your area.

catch22

Thanks, OJ. Watched some of this in the morning on Bloomberg for the May contract, which finished with a bang.

Someone's money pile is smaller this evening, eh?

A pretty color chart for WTI/NYMEX

Old_Joe

Cool chart- thanks!

Crash

I have ZERO sympathy for those suck-holes. Let them pay me to fill my tank up, then.

MikeM

Oil investment may be a value trap in these rapidly changing times. Is it really undervalued or is it's apparently easy accessibility and the alternative competition finally setting the new standard price for this commodity? I would bet a trap. I don't think oil will ever rebound even close to it's highs, at least I'm 50% sure of that!

Old_Joe

@MikeM- so, what's your other 50% sure of?

catch22

Hi @MikeM ....................

at least I'm 50% sure of that!

Now you're beginning to sound like you're ready for daytime investment television.
I think we need to get you some inside contact folks.

I'll add this to my quote book of 2020 investment highlights.

LewisBraham

Capitalism at its best--overleverage, overcapacity, overproduction, then bankruptcy.
American capitalism at its best--overleverage, overcapacity, overproduction, bankruptcy, then taxpayer-funded socialist bailouts for investors and golden parachutes for failed CEOs who put too much leverage on a highly cyclical business in the first place.

Crash

I see gas here (HI) is at $3.19. That's a bargain, HERE. But not really, if the price per barrel of oil turned NEGATIVE, today.......

MOZART325

The main losers were retail investors who own USO. There was forced selling because the ETF had to roll from the May contract to the June contract and they cannot accept delivery. ETFs like this are toxic waste and should not be allowed.

msf

Gasoline prices operate in a rigged system. When oil prices fall, it takes several weeks for the drop to work its way through the pipeline. But when oil prices rise, gasoline stations raise prices almost immediately, citing "rising costs".

"In other words, everyone raises prices quickly and lowers them slowly because, well, they can."
https://www.latimes.com/business/story/2020-01-07/lazarus-column-why-do-gas-prices-rise-quickly-drop-slowly

Old_Joe

I'd guess that the investors who clamored to get ahold of Aramco stock aren't too happy either.

msf

Watching oil prices now - they're "down" 103.7%, meaning that they've "dropped" 103.7% from around -$37 to around +$1.37.

That is, the price change is in the neighborhood of -103.7% x -$37 ~= +$38.37

Ain't arithmetic great

rono

Howdy folks,

Curious times we live in. On CNBC the hot topic yesterday was are the oil majors going to able to continue their dividends. How many of our funds are chock full of these and other BV darlings that also won't come back? This applies to index funds particularly. Be careful what you own. What used to be safe . . .

And so it goes

Peace and Flatten the Curve

Rono

Derf

Very little gas tax available, so more road worries(potholes) ! Off to a bumpy start for the year !
Enjoy your day, Derf

msf

That's a good point. Though excise tax revenue is a fixed amount per gallon, so at least revenue doesn't drop as gasoline prices decline. The revenue declines "only" because gasoline consumption is rapidly declining.

Merchandise is still being moved by large trucks even as passenger traffic declines. So the wear and tear on the roads per gallon of gas consumed is likely going up. (Speculation on my part.) This exacerbates the road maintenance problem.

" [M]otor fuels taxes are an imperfect user fee because they do not differentiate among vehicles that cause greater or lesser road wear for the same amount of fuel consumed ...."
https://www.taxpolicycenter.org/briefing-book/what-highway-trust-fund-and-how-it-financed

State and local taxes are different. I believe that sales tax on gasoline are generally treated the same as sales tax on any other item. The revenue goes into the general fund. Declining sales tax revenue during the lockdown is a major problem for cities and states independent of gasoline price issues.

States may also impose their own gasoline excise taxes dedicated to transportation expenditures. Like the federal taxes, these state gas taxes may be fixed per gallon. So they too don't account for an increasing percentage of trucks on the road.

See, e.g. California's FAQ How Does the State Spend Gasoline Tax Revenues?

FD1000

msf said:

Gasoline prices operate in a rigged system. When oil prices fall, it takes several weeks for the drop to work its way through the pipeline. But when oil prices rise, gasoline stations raise prices almost immediately, citing "rising costs".

"In other words, everyone raises prices quickly and lowers them slowly because, well, they can."
https://www.latimes.com/business/story/2020-01-07/lazarus-column-why-do-gas-prices-rise-quickly-drop-slowly

So how come when oil prices go up I see an increase in my local gas station within hours but when oil crashes It takes weeks?
Capitalism at it's worse

Anna

When prices are low, the gasoline supply sells, the suppliers don't create cheap surpluses, so when the price increases the more expensive gas enters the supply stream immediately. When price is high, users conserve, suppliers over produce and the more expensive gasoline takes a while to work through the supply steam. So prices increase rapidly and decrease less rapidly. (And yes, I made this all up but it made sense to me.)

msf

"It doesn't matter what anybody thinks, the price reflects the end results of all decisions. The price is always right " (FD1000, April 9).

As to what those decisions are based on, the LA Times article makes a good start in observing that consumption is fairly inelastic, information is asymmetric, and the retail gasoline market is locally an oligopoly.

If you'd like a more theoretical underpinning, retail gasoline prices may be the textbook example of Edgewood price cycles. Investopedia writes that the Edgewwood price cycle "is mainly seen among companies selling commodified products, such as gasoline."

A very readable, short (7 pages plus references) exposition is this 2011 article by Michael D. Noel, UCSD.
https://www.noeleconomics.com/articles/NOEL_palgrave.pdf

Edgeworth Price Cycles refer to an asymmetric pattern of prices that result from a dynamic pricing equilibrium among competing oligopolists. The resulting time series takes on a sawtooth shape – many small price decreases interrupted only by occasional large price increases. ...

Edgeworth Price Cycles are the leading theory behind the asymmetric price cycles that appear in many retail gasoline markets around the world. First observed in some U.S. cities in the 1960s, they have become commonplace in many U.S., Canadian, Australian and European retail gasoline markets ... and visually are very similar to the theoretical cycles. ...

The seminal theory paper on Edgeworth Price Cycles is Maskin & Tirole (1988), who gave the cycles their name.

You can find the Maskin & Tirole paper at JSTOR (free access to a limited number of papers per month).
https://www.jstor.org/stable/1911701

BenWP

I'm not out much these days, but I did buy gas for $1.19 in AA. Other stations are charging more, up to $1.89 at the places whose prices are usually very high.

Derf

Tuesday cash price $.999 /gal or debit card. One hour later, word came of station @ $.969/ gal !
Drive on, Derf

Crash

$3.07 at Union 76 now. Strange: In CA, they are more expensive than everyone else. I have found them to be consistently cheaper here on the island than even the "discount" local chain. ...Anyhow, there's one more instance of how high the gas is in Hawaii.