Oil price hasn’t gone negative yet, so be careful…

I lost the count of phone call I got that night while I was live on television for hours. Now things seem to have calmed down, I can tell you all about it in details again even though I already tackled this issue on my YouTube channel.

You must have noticed the recent anomaly in crude oil WTI futures contracts prices. The crude for May delivery fell more than 100 percent, which means prices collapsed into negative territory in futures markets, as a result producers had no choice but to pay traders to take the oil off their hands. I’ve seen negative yield before in bonds and bills before but this time the price of a commodity has unprecedentedly went negative. There is a simple reason for this:

Normally, speculators sell their future contracts before their expiration. However, this time more people decided to wait until the last moment after they realized they have been making losses because of purchases by those who thought things would get better. There was also the fact that they would have to pay traders to take oil off their hands before the expiration dates of their contracts. As the name implies, a speculator does not demand the physical ownership of any commodity s/he trades. What I mean is what we saw the other day was nothing but a panic selling. The rush of people who did not want to have to buy the amount of oil indicated in the contract suddenly created a selling frenzy. Although some speculators thought this was meant to be and there was nothing they could do about it, there was not enough physical space to store such huge amounts of oil. People stocked up on it like crazy because of the poor demand. I guess, they are stocking up on whatever they are producing.

As in futures markets, investment transactions are performed at a certain margin, and the margin invested by speculators kept disappearing, they had no choice but invest money again. This being the case those who made major losses in their crude oil contracts had to turn their positions in gold and other commodities into cash, therefore causing a big selling wave in commodity markets. According to experts, a similar thing might happen in June contracts. I guess we shall wait and see.

There’s also a political aspect to all this: As Trump has been preparing himself for his second term, he has really ramped up his efforts to prevent oil prices from rising. But now we are facing a demand crisis and no one could expect such drastic fall. Knowing that Trump has bigger problems to deal with, such high unemployment and closed firms, I don’t think he will consider losses in Oil and Gas industries a priority matter. Even though he said that he would not leave these two sectors alone, almost every other sector including air transportation and small scale enterprises is riddled with problems. So, I don’t think Trump would take any action now that might cause a rise in oil prices.

By the way, there’s no guarantee that demand restrictions will help oil prices go up. Poor demand-led falling prices combined with demand restrictions may lead to revenue-related problems. I believe this problem will automatically solve itself when we will hear some good news about the coronavirus pandemic. Besides, prices have been slowly improving since yesterday.

Remember, prices never went negative before in spot markets. This phenomenon has been specific to future contracts, an image that we won’t easily erase from our memories.

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