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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.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.
© 2015 Mutual Fund Observer. All rights reserved.
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Comments
Someone's money pile is smaller this evening, eh?
A pretty color chart for WTI/NYMEX
I think we need to get you some inside contact folks.
I'll add this to my quote book of 2020 investment highlights.
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.
"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
That is, the price change is in the neighborhood of -103.7% x -$37 ~= +$38.37
Ain't arithmetic great
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
Enjoy your day, Derf
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?
Capitalism at it's worse
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 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
Drive on, Derf