Negative crude? Is that a thing? – Guest Editorial
Cushing, Oklahoma is where all the WTI goes while it waits for someone to export it or send it to the refinery and, until recently, the town had diminishing importance. Now, it’s like that expensive club that you can’t get into and no amount of credit cards, or bribing the doorman, will get you a seat at the table, says Brad Alexander
By Brad Alexander.
London-based Brad Alexander is CEO of FXLarge, a content provider whose clients are retail forex brokers and educators who are looking for the best way to motivate, educate and inspire their clients to trade better and with more confidence. The company provides bespoke and White Label educational and how-to videos and a twice weekly market update with trading ideas and timely commentary.
If your world is like mine, you get non-financial friends and family asking, “What’s this trading thing all about? What makes it go?”
If you are smart, and want to keep it simple, your answer might sound something like, “Supply and demand. It’s all about Supply and Demand; everything from toothpaste, to your house, to currencies, or anything for that matter. If people want it, the price goes up. If they don’t want it, the price goes down.”
“Ah!”, they might respond, and the more savvy ones might dig deeper and ask, “So, when the Fed lowers interest rates, why does the dollar go down?”
You answer, “Again; Supply and Demand. When interest rates go down…less desirable…value falls. Supply and Demand.”
That’s the quick answer of course and, depending on the audience, you can go much deeper and make it far more fascinating (or more boring, depending on your victim). However, when responding to that question, I can absolutely, positively guarantee that you would never come up with, “The value of the dollar goes down because there is no place to put it! We are just bursting at the seams with all the dollars!”
That just doesn’t happen.
However, looking at Oil, with the current state of our global “locked-down” economies, nobody is flying, driving, waterskiing, or manufacturing much. Therefore, demand is so low and the market is in such a state that the major financial news networks felt it necessary to introduce us to a small town in the US called Cushing.
Cushing, Oklahoma is where all the WTI goes while it waits for someone to export it or send it to the refinery and, until recently, the town had diminishing importance. Now, it’s like that expensive club that you can’t get into and no amount of credit cards, or bribing the doorman, will get you a seat at the table.
Not bad for a town of 7,800 inhabitants, storage for 76,000,000,000 barrels of oil, a Pizza Hut, and a huge Wal-Mart. Basically, industry experts are predicting that supply will exceed storage capacity at Cushing within a few weeks.
So, our “Supply and Demand” philosophy takes on a whole new paradigm: “Supply, Demand, and Where-the-heck-do-I-put-it?”.
In fact the “supply/demand/where-the-heck-do-I-put-it?” ratios became so skewed, that the May WTI contract went seriously negative with producers “waving the white flag” saying, “Help! I don’t want this and I will pay you to take it away.”
Brent Crude has a completely different set of storage issues as the cost of supertankers keeps rising by the week and, of course, they have no place to go. Ironically, it seems that the biggest consumers of oil now are the supertankers putt-putting around the oceans wondering who will want all this Brent Crude.
This is not the first time that this has happened and, in fact, we have seen this movie recently. Last year, more than once, the price of Natural Gas (often a by-product of Crude Oil drilling) went negative for the same reasons.
So, a couple of weeks ago, just after the US Crude dip below -$40 per barrel, I did a video explaining the difference between the spot price of WTI and the various flavours of futures contracts. Inevitably, the question came back from a retail trader, “Should we go long on Crude?”
The simple answer is, “Yes”. However, very often simple answers create complicated questions. In this case the “Yes” must be followed by a “When?”
Many analysts feel that we are not out of the woods yet. We see most economies talking about lifting social distancing restrictions, which means that we can drive our cars to the petrol station, but we aren’t likely to be heading to the airport anytime soon. Manufacturing may begin but it will probably limp back to life as companies will have to ease the workforce back, slowly and safely, and perhaps with limited production.
The point being, it will take months to clear the backlog of crude inventory and we still have the threat of negative crude in a couple of weeks when the June contract expires. Having said that, S&P Global – the largest commodity index – has rolled its June contracts into July to protect investors, but this seems like climbing a tree to get away from a wolf. Eventually, you have to come down out of the tree.
Now, if life and trading weren’t interesting enough, we will have to combine the “supply/demand/where-the-heck-do-I-put-it?” ratios with our old friend – “Trade War”. (Remember last year when every tweet or press conference on US/China would screw up your open positions?). Well, news from the Orange Office indicates that US/China relations may be on the rocks again, even before we emerge from the COVID-19 thing. So, if you missed the market fluctuations from “Tarriffs-R-Us” last year, the sequel of that movie is about to hit the cinemas, just when you didn’t want to buy the popcorn.
There is, in fact, a cinema in Cushing, Oklahoma. Sadly, it looks like it will be closed for a while.
The subject matter and the content of this article are solely the views of the author. FinanceFeeds does not bear any legal responsibility for the content of this article and they do not reflect the viewpoint of FinanceFeeds or its editorial staff.