Lately there is a commodity that make a lot of buzz, I am talking about oil, the most singular thing that happened was that oil had a negative valuation for less that a day, the futures quoted -37 Dollar…. Wow that’s incredible, basically it mean that a barrel of oil (WTI) was worth less than nothing, is that possible?!
The answer is not, of course there is a reason that this strange event happen, the most evident reason is that day was the last day of a futures contract and the day after that contract expired, in this case if you still own that futures you may find a place for some barrel of oil in your basement if you still have it in your portfolio.
The issue was that some big ETC (exchange trade commodity) was forced to sell off the actual contract for buy the new one that expired one month later, if you add to this usual activity the hysteria that was surrounded oil market we can understand that this was an extraordinary situation.
But for explain how we came to this low price we may understand few more thing, we need to get our hands dirty with the so called black gold…..
Some general notions about this commodity first, the oil that we produce is different in quality and difficulty to extract, in Saudi Arabia we have just to make an hole in the desert that we may find a oil field, in Brasil Petrobras find a big oil field many kilometres under the sea level, more in general we have the American oil that is called WTI (West Texas Intermediate), the European oil is called Brent Crude, in Russia is the Ural Oil and in general the oil produced by the OPEC counties is simply called the OPEC Basket oil that have an independent valuation. The oil that went to negative level was the WTI.
Another thing we must know is that the oil is measured in barrel per day or bpd than we know that the world consume almost 100 million bpd before corona virus, right now with the lockup of half population the bid is roughly at 70 million bpd that is a cut of a -30%, we also know that the production almost match the bid before corona virus.
Some countries are highly dependent from oil production, lets think about Venezuela, Saudi Arabia or Russia, those countries get more than 75% of then GDP (gross domestic product) from oil, also is interesting note that countries like Russia and USA spend a lot to extract them oil, this affect the profitability of the companies that are in this business.
Now that we have a more clear picture of the matter we are talking about we can also understand something more, of course the oil crisis is exacerbated by the pandemic emergency that we are living but there is also a little fight between Russia and Saudi Arabia that went ballistic just few weeks before Corona virus spread in the whole world.
This fight was yet put a little pressure to the oil price that get “axed” when the world was in a lockdown mode, here we have a great and unexpected problem that jump in the equation….. the storage that is limited as this commodity was sold almost immediately, the storage problem is a hot potato for the producer that don’t want to sell them product at below the production cost (the situation that is now living USA and other countries).
Right now the producer that can afford to not sell the product are lease oil tankers and any storage that can be used to store oil, those who cant…. Well they default and invoke chapter 11 for protect from creditors, also the traditional piplines are now used to store oil that the market not want to buy as they don’t need.
There is a solution anyway, but the solution is painful for many countries and companies, OPEC+ (OPEC countries plus USA and Russia) was agree on a cut of 9,7 million bpd but just for may and June, this agreement is to small and come to late, too small because we just say that the bid is roughly 30 million bpd less and too late because two month is not enough for sell the reserve we have stored everywhere.
The cut that can make a difference would be something between 30 to 35 million bpd, the possibility that Saudi Arabia could cut more production is real as the energy minister ventilated this option but also USA and Russia may quit more oil rings or we will face a real crisis in term of occupation and instability connected to this fragile balance of power.
Finally we came again at the negative price of WTI oil (American oil futures) this negative price is a mix of lack of storage place + low price (below the production cost) + rolling process (when an ETF sell a futures contract and buy another one of a longest expiring date), we probably see oil price at this low level for a while…. Just a serious cut of oil ring production can push up the price of this commodity (at least at production level) .
How we can invest on oil in crypto world?.....
Well there is a rising star exchange on derivates, FTX that just quoted a futures that let us invest on this commodity, the price of this futures is structured in this way….. oil price+ 100 dollars than we can have some insurance that our derivates will not going negative…. Lets hope that oil price not breach -100 Dollars 😉
About this market I have a lot to say but I just try to make things simple and not too “geopolitical” complicated but if you are interested in a deeper look just comment to this post than I may know that someone is interested in a deeper understanding of this market, after all we can make some money thanks to FTX futures.
