Free Fall, Oil Prices Go Negative
04-21-2020, 02:10 PM
Post: #1
 Albert Chan Senior Member Posts: 2,556 Joined: Jul 2018
Free Fall, Oil Prices Go Negative
https://www.npr.org/sections/coronavirus...disappears

This negative price make the math weird.

-$20 → -$40: Gain = (-40/-20) - 1 = 100%

However, I did not see the market people plot it this way ...
04-21-2020, 02:37 PM
Post: #2
 Maximilian Hohmann Senior Member Posts: 1,271 Joined: Dec 2013
RE: Free Fall, Oil Prices Go Negative
Hello!

(04-21-2020 02:10 PM)Albert Chan Wrote:  ... = 100%

Certainly for the buyer. But this shows again what I always thought about financial calculations and financial calculators: They are beaten by reality to a degree that renders them completely useless :-)

Regards
Max
04-21-2020, 02:45 PM
Post: #3
 SlideRule Senior Member Posts: 1,444 Joined: Dec 2013
RE: Free Fall, Oil Prices Go Negative
G I - G O ??

BEST!
SlideRule (MBA,scl)
04-21-2020, 04:45 PM (This post was last modified: 04-21-2020 04:46 PM by toml_12953.)
Post: #4
 toml_12953 Senior Member Posts: 2,095 Joined: Dec 2013
RE: Free Fall, Oil Prices Go Negative
(04-21-2020 02:10 PM)Albert Chan Wrote:  https://www.npr.org/sections/coronavirus...disappears

This negative price make the math weird.

-$20 → -$40: Gain = (-40/-20) - 1 = 100%

However, I did not see the market people plot it this way ...

The article says they're running out of places to store the oil. How about this: JUST STOP PUMPING IT OUT OF THE GROUND?

Tom L
Cui bono?
04-21-2020, 05:05 PM
Post: #5
 Geoff Quickfall Senior Member Posts: 786 Joined: Dec 2013
RE: Free Fall, Oil Prices Go Negative
Ah!

Politics, I will not sacrifice my overproduction (devalue oil) until my competitors can no longer explore or support production that costs 30\$ per barrel.

The Saudi’s have been oil production warring with the Russians for the last year knowing that Russian, American, Canadian ... oil costs more to produce then they can sell it for as long as the Saudis are flooding the market.

Geoff

So no where to store it, crazy world.
04-21-2020, 05:39 PM
Post: #6
 Maximilian Hohmann Senior Member Posts: 1,271 Joined: Dec 2013
RE: Free Fall, Oil Prices Go Negative
Hello!

(04-21-2020 05:05 PM)Geoff Quickfall Wrote:  So no where to store it, crazy world.

Saturated markets must be the worst nightmare for every business. When contract penalties for holding the production are high enough that you give away the product not only for free but with an extra bonus. The money market has had negative interest for quite a while already...

And it starts to hit the calculator market: During the last week I bought a Ti Nspire (version 1) for 1 Euro, a Voyage 200 for 5 Euros and a nice burgundy Ti 82 stats for 1 Euro. Not long and someone will offer 100 Euros to anybody who helps him get rid of his Hp 35 red dot :-)

Regards
Max
04-22-2020, 07:18 AM
Post: #7
 Massimo Gnerucci Senior Member Posts: 2,663 Joined: Dec 2013
RE: Free Fall, Oil Prices Go Negative
(04-21-2020 02:45 PM)SlideRule Wrote:  G I - G O ??

BEST!
SlideRule (MBA,scl)

Greetings,
Massimo

-+×÷ ↔ left is right and right is wrong
04-22-2020, 11:26 AM
Post: #8
 BillBee Member Posts: 208 Joined: Feb 2020
RE: Free Fall, Oil Prices Go Negative
(04-22-2020 07:18 AM)Massimo Gnerucci Wrote:
(04-21-2020 02:45 PM)SlideRule Wrote:  G I - G O ??

BEST!
SlideRule (MBA,scl)

I love this.... to be printed and hung up at work.

Thank - you!
Bill
04-22-2020, 02:34 PM (This post was last modified: 04-22-2020 10:30 PM by Valentin Albillo.)
Post: #9
 Valentin Albillo Senior Member Posts: 1,100 Joined: Feb 2015
RE: Free Fall, Oil Prices Go Negative
.
Hi, all:

About negative oil prices, just a question ...

If you fill up your car's tank at the gas station, will it be for free plus they'll give you a tenner of two for the bother ?

V.

Edited to correct a typo ("Staion")

All My Articles & other Materials here:  Valentin Albillo's HP Collection

04-22-2020, 02:37 PM
Post: #10
 KeithB Senior Member Posts: 484 Joined: Jan 2017
RE: Free Fall, Oil Prices Go Negative
It is xkcd 2295.
The mouseover text is good, too:
'Garbage In, Garbage Out' should not be taken to imply any sort of conservation law limiting the amount of garbage produced.
04-22-2020, 03:13 PM
Post: #11
 David Hayden Senior Member Posts: 460 Joined: Dec 2013
RE: Free Fall, Oil Prices Go Negative
I wondered how prices coud go negative and looked into it. I believe it works like this:

Some time ago, let's say January, someone buys a "futures contract" to take delivery of a tanker full of oil on May 1st.

Lots of other people do the same thing, and they buy and sell these contracts as Wall Street traders do. None of these traders intends to actually take delivery of the oil, they just hope to buy low and sell high.

The key here is that they intend to sell. Indeed they must sell because they have nowhere to put a frickin' tanker full of oil in their Manhattan apartments.

Meanwhile in Saudi Arabia, ARAMCO fills a tanker with oil and starts it heading to the USA. That contract is valid so they have to deliver that oil.

But where to deliver? The tanker captain has to know ahead of time. So the contract to take delivery of oil on May 1 actually "expires" (or some phrase like that) on April 20. At that point, whoever holds the contact can't sell it and they have to tell the captain where the oil should be delivered.

So back in January, lots of people bought contracts for lots of oil to be delivered on May 1. Then COVID-19 happened, the demand for oil decreased and nobody wanted to take delivery. So as April 20 got closer and closer, the price of those contracts went down and down until finally, the poor slobs holding the contracts were paying people to take them. Again, the ones who held the contracts had nowhere to put the oil so they had to get rid of the contract and ended up paying people to take it.

This is how the price drops below zero and why the Saudi's didn't just stop pumping the oil. Presumably they will decrease production, but hey, a contract is a contract.

Dave
04-22-2020, 03:26 PM (This post was last modified: 04-22-2020 03:28 PM by Maximilian Hohmann.)
Post: #12
 Maximilian Hohmann Senior Member Posts: 1,271 Joined: Dec 2013
RE: Free Fall, Oil Prices Go Negative
Hello!

(04-22-2020 03:13 PM)David Hayden Wrote:  Again, the ones who held the contracts had nowhere to put the oil so they had to get rid of the contract and ended up paying people to take it.

I also read an article about that in a German newspaper which explained it much like you do. But still I wonder who those last "buyers" of the contracts may be? And what they intend to do with their oil. Or are they just fraudsters who take the "free money", burn those contracts and hide somewhere on a tropical island and let everything else be the problem of other people?
But then I guess the money will only get paid _after_ the contract is fulfilled and the oil is actually pumped into an empty tanker or pipeline, neither of which exist at this time. So these negative prices are actiually an offer (that no one can take) and really only exist on paper.

Regards
Max
04-22-2020, 04:56 PM
Post: #13
 lrdheat Senior Member Posts: 856 Joined: Feb 2014
RE: Free Fall, Oil Prices Go Negative
I’m waiting for the oil to start showing up on overstock.com ...
04-22-2020, 07:59 PM
Post: #14
 toml_12953 Senior Member Posts: 2,095 Joined: Dec 2013
RE: Free Fall, Oil Prices Go Negative
(04-22-2020 02:34 PM)Valentin Albillo Wrote:  .
Hi, all:

About negative oil prices, just a question ...

If you fill up your car's tank at the gas staion, will it be for free plus they'll give you a tenner of two for the bother ?

V.

On a slightly related note, I once went through all the car magazines and bought and then installed every gadget that claimed to improve my gas mileage. Now I have to stop every hundred miles or so to syphon excess gas out of my tank or it'll overflow.

Tom L
Cui bono?
04-22-2020, 09:13 PM
Post: #15
 Monte Dalrymple Member Posts: 299 Joined: Jan 2014
RE: Free Fall, Oil Prices Go Negative
(04-22-2020 03:26 PM)Maximilian Hohmann Wrote:  Hello!

(04-22-2020 03:13 PM)David Hayden Wrote:  Again, the ones who held the contracts had nowhere to put the oil so they had to get rid of the contract and ended up paying people to take it.

I also read an article about that in a German newspaper which explained it much like you do. But still I wonder who those last "buyers" of the contracts may be? And what they intend to do with their oil. Or are they just fraudsters who take the "free money", burn those contracts and hide somewhere on a tropical island and let everything else be the problem of other people?
But then I guess the money will only get paid _after_ the contract is fulfilled and the oil is actually pumped into an empty tanker or pipeline, neither of which exist at this time. So these negative prices are actiually an offer (that no one can take) and really only exist on paper.

Regards
Max

At least some of the oil can go into the Strategic Petroleum Reserve if the government takes delivery, but that eventually fills up and tankers may end up steaming in circles.
04-22-2020, 09:58 PM
Post: #16
 toml_12953 Senior Member Posts: 2,095 Joined: Dec 2013
RE: Free Fall, Oil Prices Go Negative
(04-22-2020 09:13 PM)Monte Dalrymple Wrote:  At least some of the oil can go into the Strategic Petroleum Reserve if the government takes delivery, but that eventually fills up and tankers may end up steaming in circles.

At least they'll be burning oil!

Tom L
Cui bono?
04-22-2020, 11:35 PM
Post: #17
 teenix Senior Member Posts: 2,053 Joined: May 2016
RE: Free Fall, Oil Prices Go Negative
At least the atmosphere gets a chance to improve a bit, albeit briefly.

cheers

Tony
04-23-2020, 01:50 PM
Post: #18
 jjohnson873 Member Posts: 197 Joined: Dec 2013
RE: Free Fall, Oil Prices Go Negative
(04-22-2020 03:13 PM)David Hayden Wrote:  I wondered how prices could go negative and looked into it. I believe it works like this:
.........
This is how the price drops below zero and why the Saudi's didn't just stop pumping the oil. Presumably they will decrease production, but hey, a contract is a contract.
Dave
Nicely explained, David. And who said we didn't learn from the real estate derivatives market in 2008? Just replace the term "real estate" with "oil".
~ Jim J. ~
04-24-2020, 05:56 PM
Post: #19
 Guy Macon Junior Member Posts: 27 Joined: Mar 2019
RE: Free Fall, Oil Prices Go Negative
[/quote]
The article says they're running out of places to store the oil. How about this: JUST STOP PUMPING IT OUT OF THE GROUND?
[/quote]

That's not how the futures market works.

Wikipedia: Futures contract

The seller already agreed to sell oil at a predetermined price at a specified time in the future, so he gets paid the agreed-upon price (not today's price), he makes a profit, and he has to honor his contract to deliver. If the price had gone up the buyer would have gotten a bargain. Because the price went down the buyer ends up overpaying and takes a loss.

Here is an explanation from the NYT:

"What Negative Oil Prices Mean and How the Impact Could Last: The strange thing that happened in oil markets does not mean you can make money storing oil, or that gasoline will cost nothing."

https://www.nytimes.com/article/negative...story.html
04-24-2020, 11:01 PM
Post: #20
 toml_12953 Senior Member Posts: 2,095 Joined: Dec 2013
RE: Free Fall, Oil Prices Go Negative
The article says they're running out of places to store the oil. How about this: JUST STOP PUMPING IT OUT OF THE GROUND?
[/quote]

That's not how the futures market works.

Wikipedia: Futures contract

The seller already agreed to sell oil at a predetermined price at a specified time in the future, so he gets paid the agreed-upon price (not today's price), he makes a profit, and he has to honor his contract to deliver. If the price had gone up the buyer would have gotten a bargain. Because the price went down the buyer ends up overpaying and takes a loss.

[/quote]

A friend of mine bought futures on a tanker full of oil. He delayed too long to sell it off and the tanker docked and he had a tanker full of oil he couldn't get rid of. Not only was he stuck with the oil, he had to pay the all the fees for each day the tanker was docked. A few million dollars later he managed to sell the oil.

Tom L
Cui bono?
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