Closing Thought–21Apr20

I remember the oil hysteria from the 1970s and 80s…..I can recall when I was young gas was 35 cents a gallon (I know…I am old)……and I have watched it go to $5 a gallon and more…..but I never thought that the oil markets would ever do what they did yesterday….

It’s been a historic day in the financial markets: Oil futures plunged below zero Monday for the first time as demand for energy collapsed amid the coronavirus pandemic. The plunge led to a drop in stocks, too: The Dow fell 592 points, or 2.4%, to 23,650; the S&P 500 fell 51 points, 1.7%, to 2,823; and the Nasdaq fell 89 points, 1%, to 8,560. But the market’s most dramatic action was by far in oil, where benchmark US crude for May delivery plummeted to negative $35.20 per barrel at 2:30pm Eastern, per the AP. It was nearly $60 at the start of the year. Much of the drop into negative territory was chalked up to technical reasons—the May delivery contract is close to expiring so it was seeing less trading volume, which can exacerbate swings. But prices for deliveries even further into the future, which were seeing larger trading volumes, also plunged.

Demand for oil has collapsed so much that facilities for storing crude are nearly full. Tanks could hit their limits within three weeks, according to Chris Midgley, head of analytics at S&P Global Platts. Benchmark US crude oil for June delivery, which shows a more ”normal” price, fell 14.8% to $21.32 per barrel, as factories and automobiles around the world remain idled. Big oil producers have announced cutbacks in production in hopes of better balancing supplies with demand, but many analysts say it’s not enough. “Basically, bears are out for blood,” analyst Naeem Aslam of Avatrade said in a report. “The steep fall in the price is because of the lack of sufficient demand and lack of storage place given the fact that the production cut has failed to address the supply glut.”

As an international relations geek it will be interesting to see how this effects geopolitics….especially nations that have nothing but oil to offer the world…like Saudi Arabia.

But not to worry we will NEVER return to the days when a dollar would fill the tank….sorry about that crappy news.

Further Reading:

Some further views on this oil thingy……

Oil prices remained in turmoil in the US and the world on Tuesday, reports the Wall Street Journal. On Monday, the US benchmark dipped into negative territory for the first time, settling at -$37.63 per barrel. On Tuesday, the price improved, but remained in the red at -$6.30 per barrel. Meanwhile, the international benchmark (Brent crude futures) dropped 15% to $20.67 on Tuesday, the lowest figure in nearly 20 years. Coverage:

  • AOC’s revised tweet: When news of the historic slide into negative territory broke Monday, progressive Rep. Alexandria Ocasio-Cortez tweeted that “you absolutely love to see it,” but then deleted the tweet for what Business Insider calls a more “tempered” response. After calling this a “turning point in the climate movement,” the proponent of a Green New Deal wrote: “Fossil fuels are in long-term structural decline. This along w/ low interest rates means it‘s the right time to create millions of jobs transitioning to renewable and clean energy. A key opportunity.”
  • Not the ‘true’ price: In some ways, the negative price is an anomaly because of some financial “nuance”—it involves futures contracts, not the price of physical oil, writes Pippa Stevens at CNBC. How the AP explains it: “Trading of contracts for US oil to be delivered in May ends on Tuesday, meaning that the extreme drop does not accurately reflect the long-term view of the value of crude but rather investors’ ability to take delivery of it now. The next futures contract, for delivery in June, is considered to now be closer to the ‘true’ price of crude.” But that price is not so great, either: The June price was down to just $16.58 a barrel Tuesday morning.
  • Stop the spigots: The chief economist at commodities trader Trafigura puts it this way to the Journal: “This is the market signaling to producers that you need to cut off more production faster because we’re drowning in oil at this point.”
  • Gas pumps: Sorry, this does not mean you’ll be getting free gasoline, notes the Washington Post. The dip into red ink is “fleeting, and symbolic, more than anything, and it won’t have much effect on the price of gasoline at the pump,” writes Will Englund. “But it showed just how much the coronavirus pandemic has crushed the world’s energy markets—and how the global effort to stabilize them was failing.”
  • Quite a deal: At the New York Times, Neil Irwin writes about the “mind-bending” development. “If you happened to be in a position to take delivery of 1,000 barrels of oil in Cushing, Okla., in the month of May—the quantity quoted in the relevant futures contract—you could have been paid a cool $37,630 to do so.” And, yes, there’s a “technical” market explanation, “but the broader takeaway is that the COVID-19 crisis is an extraordinary deflationary shock to the economy, causing the idling of a vast share of the world’s productive resources.” And “the consequences will almost surely persist beyond the period of widespread lockdowns.”

I Read, I Write, You Know

“lego ergo scribo”

6 thoughts on “Closing Thought–21Apr20

  1. No matter how much the price of crude contracts, the savings will never make it to the pump to any significant degree.

  2. One effect I can report on is the drop in the cost of the kerosene heating oil that we use for our boiler to heat our hot water and central heating system. I took delivery last week of 500 litres to top up our 1200 litre tank. This cost significantly less than the last delivery three months ago. The total price had dropped from £248 to £188. In 2012 when we bought the first 500 litres after moving here, it cost almost £400. it has been dropping steadily since, and this is the lowest it has been for over almost 20 years, according to our neighbours.
    That has not transferred to pump prices for diesel and petrol in our cars though. That has stayed the same for over 6 months.
    Best wishes, Pete.

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