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| Oil from Canada's oilsands typically trades at a discount to the U.S. oil price at the best of times, and the latter dropped to minus $37.63. (Jeff McIntosh/The Canadian Press) |
OPEC deal to cut production fails to offset even greater plunge in demand for fuel
Oil prices plunged on Monday as traders got caught in a desperate race to offload contracts for just about any price they could get.
The price of a contract to deliver West Texas Intermediate crude oil next month plunged below zero, as traders got caught in flurry to sell their contracts before having to actually receive the oil.
The oil price is determined through investments known as futures contracts, which are agreements to buy and sell a certain amount of oil at a certain time in the future. The contract to deliver oil in May has been the most commonly traded contract of late, so it is currently considered to be the best proxy for the current oil price. Soon June’s contract will be the benchmark.
Typically the contracts are bought and sold countless times before the oil is actually delivered to the final buyer. But the May contract is set to finalize on Tuesday, which means anyone holding contract at that point is agreeing to actually physically acquire the oil.
That’s easier said than done lately, as storage tanks in North America are almost full to the brim, making it hard to find a place to put more oil. The U.S. oil hub in Cushing, Okla., had 55 million barrels of oil in storage as of Friday, about 70 per cent of their full capacity and the fullest they’ve been in two years.
Monday’s startling oil price plunge was caused by traders feverishly trying to offload the contract before they actually have to find a place to keep the oil starting next month. When the futures market closed for the day, the May WTI contract sat at -$37.63. If that price holds until the end of Tuesday, it means anyone holding that contract will have to pay more than $37 for the right to also hand over a barrel of oil in May.
Under normal circumstances, the futures contract gets blended from one month into another fairly seamlessly as traders can always manage to shuffle the crude to a willing buyer somewhere in the interim. Not this time, though. “The drop is far more extreme as traders struggle to roll positions forward to the next month’s contract, taking massive losses as a result, “ said Bernadette Johnson, vice-president of strategic advisory group, Enverus.
“This may prove to be one of the worst deliveries in history,” said Phil Flynn, senior market analyst at Price Futures Group in Chicago. “Nobody wants or is in need of oil right now.”
CME, which runs the market on which oil futures contracts are traded, clarified just last week that negative prices were theoretically possible, even though they had never happened in oil. “Support for zero or negative futures … is standard throughout CME systems,” the CME said.
While jarring, the oil price plunging into negative territory doesn’t functionally mean that oil companies are en masse having to pay people to take away their product.
Rather, it means investors who created financial instruments to bet on the price of oil are having to pay hefty penalties to extricate themselves from trades they no longer want to be in.
Rory Johnson, managing director and market economist at Price Street, says the plunging future price is more like a “hot potato” being passed around between traders.
Whoever gets stuck with the hot potato “will be stuck with thousand of barrels of physical oil and no where to put it, which will get expensive very quickly,” he said.
Storage on land is filling up everywhere, so some producers have taken to storing their excess oil at sea, renting tankers to float aimlessly to store the crude until a higher price or buyer can be found. Rates for the biggest oil tankers have soared as producers scramble to secure space to keep the crude they don’t know what else to do with.
“Floating storage remains the only outlet for a mismatched production and consumption backdrop,” Evercore shipping analyst Jonathan Chappell said in a note to clients last week.
The going rate for the biggest oil tankers in the world hit $165,000 a day this weekend, Chappell calculates, but despite that up-front cost, “it is difficult to envision a scenario where floating storage is not economic and required over the coming months.”
Source: Pete Evans | CBC News
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