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Is this why they pay to get rid of produced oil (negative prices)? I guess is better to lose a bit hoping things turn around than closing well /suffering long t

Is this why they pay to get rid of produced oil (negative prices)? I guess is better to lose a bit hoping things turn around than closing well /suffering long term damage.

icu 6y ago
It was the oil exchange traded funds (ETFs) who trade the oil contract that suddenly found themselves trapped between owning oil contracts and not being able to offload them in time for delivery. Commodity prices are based on the delivery of the physical goods for a given month. If you don't get rid of the contract by the date stipulated in the contract, you are contractually obligated to take delivery. If you're a financial institution setup to buy contracts from producers and sell contracts to refineries, you probably don't have any infrastructure to take delivery and safely store crude (which is highly toxic stuff). This is partly why prices went negative. Too many contracts were held by institutions who could not deal with delivery. IMHO I believe there are other reasons behind negative oil prices: * Co-ordinated central bank action since 2008 that has led to 'ZIRP'--zero interest rate policy. * ZIRP leads to the misallocation of capital (US shale may not have happened if interest rates were higher) * The Petrodollar System (oil is denominated in USD) * The Eurodollar System (non-US banks make USD denominated loans to non-US firms) * Geo-politics of the US reserve currency status which is being challenged by Russia (Russia doesn't like the foreign policy constraints that come with the USD being the world's reserve currency) * Geo-politics of the Saudis not liking US oil production (the Saudi influence on US geopolitics has waned since the US has become the largest oil producer) * The 'milkshake dollar theory' (the USD will gain relative to other currencies and that will cause systemic domestic and global economic problems). The obvious thing is to blame it all on the COVID-19 demand shock, but I think it's really a multivariate problem. The global economic outlook and geopolitics were shaky prior to the pandemic.
- redis_mlc 6y ago
  > the Saudi influence on US geopolitics has waned since the US has become the largest oil producer Saudi influence has also waned since they gave $2 billion to the Clinton Foundation ... and Hilary lost. Oops! https://www.vox.com/2016/8/25/12615340/hillary-clinton-foundation https://www.vox.com/2016/8/25/12615340/hillary-clinton-found...
  - alexilliamson 6y ago
    That article you posted says the Saudis gave 25 million to the Clinton Foundation. Oops!
goodcanadian 6y ago
It is a question of whether it will cost more to store the oil than it does to "sell" it at a loss. That said, I doubt many producers truly sold for negative prices. The negative prices were a commodities market effect where traders were required to pay to offload their futures contracts in order to not take delivery of the oil. In other words, I suspect the commodities traders bore the brunt of the negative pricing.
- bob33212 6y ago
  Wouldn't a refinery or storage facility in a country with lax regulations just burn their existing stockpile and take some off this oil at a negative price
  - gen3 6y ago
    I guess the issue with this is that it’s a physical item being delivered to the US, not any country. I’m not sure what the laws are when it comes to burning stuff off in the US.
- perl4ever 6y ago
  "traders were required to pay to offload their futures contracts in order to not take delivery of the oil" That doesn't seem accurate, since the expiring futures rebounded to a positive value the next (and final) day, right? It seems more like people were panicking and thought they had to unload at any price, but it was simply an error. Although I'm not knowledgeable about it.
  - toast0 6y ago
    If you were a speculative trader, and absolutely didn't want to have any oil delivered to you, it makes sense to sell at close the day before the futures become binding. You could wait until the last day, but you'd have a big problem if the market was closed that day becomes of unexpected circumstances.

Is this why they pay to get rid of produced oil (negative prices)? I guess is better to lose a bit hoping things turn around than closing well /suffering long term damage.

icu 6y ago

It was the oil exchange traded funds (ETFs) who trade the oil contract that suddenly found themselves trapped between owning oil contracts and not being able to offload them in time for delivery. Commodity prices are based on the delivery of the physical goods for a given month. If you don't get rid of the contract by the date stipulated in the contract, you are contractually obligated to take delivery. If you're a financial institution setup to buy contracts from producers and sell contracts to refineries, you probably don't have any infrastructure to take delivery and safely store crude (which is highly toxic stuff). This is partly why prices went negative. Too many contracts were held by institutions who could not deal with delivery. IMHO I believe there are other reasons behind negative oil prices: * Co-ordinated central bank action since 2008 that has led to 'ZIRP'--zero interest rate policy. * ZIRP leads to the misallocation of capital (US shale may not have happened if interest rates were higher) * The Petrodollar System (oil is denominated in USD) * The Eurodollar System (non-US banks make USD denominated loans to non-US firms) * Geo-politics of the US reserve currency status which is being challenged by Russia (Russia doesn't like the foreign policy constraints that come with the USD being the world's reserve currency) * Geo-politics of the Saudis not liking US oil production (the Saudi influence on US geopolitics has waned since the US has become the largest oil producer) * The 'milkshake dollar theory' (the USD will gain relative to other currencies and that will cause systemic domestic and global economic problems). The obvious thing is to blame it all on the COVID-19 demand shock, but I think it's really a multivariate problem. The global economic outlook and geopolitics were shaky prior to the pandemic.

redis_mlc 6y ago
> the Saudi influence on US geopolitics has waned since the US has become the largest oil producer Saudi influence has also waned since they gave $2 billion to the Clinton Foundation ... and Hilary lost. Oops! https://www.vox.com/2016/8/25/12615340/hillary-clinton-foundation https://www.vox.com/2016/8/25/12615340/hillary-clinton-found...
- alexilliamson 6y ago
  That article you posted says the Saudis gave 25 million to the Clinton Foundation. Oops!

goodcanadian 6y ago

It is a question of whether it will cost more to store the oil than it does to "sell" it at a loss. That said, I doubt many producers truly sold for negative prices. The negative prices were a commodities market effect where traders were required to pay to offload their futures contracts in order to not take delivery of the oil. In other words, I suspect the commodities traders bore the brunt of the negative pricing.

bob33212 6y ago
Wouldn't a refinery or storage facility in a country with lax regulations just burn their existing stockpile and take some off this oil at a negative price
- gen3 6y ago
  I guess the issue with this is that it’s a physical item being delivered to the US, not any country. I’m not sure what the laws are when it comes to burning stuff off in the US.
perl4ever 6y ago
"traders were required to pay to offload their futures contracts in order to not take delivery of the oil" That doesn't seem accurate, since the expiring futures rebounded to a positive value the next (and final) day, right? It seems more like people were panicking and thought they had to unload at any price, but it was simply an error. Although I'm not knowledgeable about it.
- toast0 6y ago
  If you were a speculative trader, and absolutely didn't want to have any oil delivered to you, it makes sense to sell at close the day before the futures become binding. You could wait until the last day, but you'd have a big problem if the market was closed that day becomes of unexpected circumstances.