Image by David Mark from Pixabay
Negative Oil Prices –
The bold and sensational headline was about negative oil prices. Prices dropped to negative $40 per barrel on Monday. Pay someone to take the oil?! Stop by and fill up your car and the Gas station pays you money with a gift and salute!
Not Quite!
This was a particular anomaly in the May futures contract due for delivery on Tuesday. Because Corona ate away all the demand for Oil, there was no place to put the oil. So Futures buyers who need to take delivery had to find storage for oil which was extremely expensive with overflowing tanks.
Backwardation in the futures price caused the Price to go extremely negative. The sensational and irrational headline was that Oil producers are all in bad shape because of this.
On the contrary, this affects the Oil traders and the banks that took the counter-party hedge. Which banks are exposed and which traders are affected – we will know in a few weeks.
This could cause systemic risk in the financial markets but the volume on the May contract was thin – a saving grace.
Regardless it was a historic moment to see negative prices on something.
All of this is setting up for an oil shock in the post-Corona world!
