At the height of trading today, /CLK20 hit -$40.32. This means someone was willing to pay you $40,320 per contract to take 1000 barrels deliverd. Seems great and all, everyone gets paid, you store them in your garage or whatever, but there is an underlying issue here... storage.
Generally, retail paper traders are not trading this contract, most brokerages won’t even allow you to trade the front month after last week. You would be forced to trade the forward (June) /CLM20 or later. People trading today are actual physical buyers and sellers, large companies needing to move physical oil. For it to go negative means a lot of people were on the phones calling around trying to find space to store said oil, and they couldn’t find the space for that oil, which drove the price negative just so they could unload the contract. Who cares right?
We should all care... why? Government has extended DoD Travel Ban to June 30 so you can be sure if they are banning non essential travel through June 30 they are likely going to ban people from coming into the work place (that cube life, the resurgence of COVID)... Travel by plane and commuting to work... the two biggest reasons for oil/gas... They have been on hold for about 1.5 months and now the government is stating that they will be on hold for another 2 months at least. Now lets not even talk about heating oil needed for the northern areas coming into spring…
You cant keep pumping oil if you have no demand for it, and you have no place to store it, although the later is more important. If you pump it, where do you put it? As I said before, to go -$40 today it means people were calling everything they could think of (container ships, tanker trucks, strategic reserve, out of the way storage facilities, etc) before they absorb a $40K loss per contract (and they sell thousands).
What must happen next, which little demand is they must idle the pumps. They cant and wont pay oil workers $100K a year to sit around with an idle pump. We have about 10M oil workers in the US. We are potentially looking at 80% of those to be laid off… and this will take months to go through existing inventory if its completely full. This will extend for months, likely into Q4 2020, even Q1 2021.
As a result of no travel and a slow opening all commerce will suffer. We are talking a stagnant society until at least June 30. More retail, consumer goods, automobile companies are going to go bankrupt. We have an annual GDP in excess of $20T. This is grinding to a halt. FED/Govt/Treasury has thrown ~$5T at it already, but they will need to throw $2T a month at it to keep it all afloat. Factor in treasuries, credit, bonds (corps), MBS, etc and we are looking at roughly $45T to service. This is all becoming increasingly more difficult to service with a stalled economy. This is where we are now.
This is why its likely unsustainable and we are about to really feel the pinch. The current market with S&P (/ES) trading at 2820 (was almost 2900 last week) is an artificial pump. How long will wall street look the other way while the government throws $1T here and there?
Submitted April 20, 2020 at 07:33PM by ShortTheDip https://ift.tt/2Km9DGQ
