Negative Oil Prices
On April 20, oil prices dropped below zero, and even to negative oil prices, for the first time in trading history. It’s kind of funny how many friends and clients messaged me asking if that meant that someone would pay them to store oil for them. In fact, some of my cousins were scheming on whether they could empty their swimming pools to temporarily store crude oil for a price.
What really happened was Covid-19. The pandemic brought travel to a screeching halt, causing a global drop in oil demand. As excess barrels piled up, storage started to run low. Investors who trade in oil futures, but who don’t have the capacity to store oil themselves, found themselves in the position of selling or getting screwed.
Once contracts expire, buyers must physically take possession of the oil. And so the price of the futures contract for the U.S. oil benchmark West Texas Intermediate (WTI) dropped below zero the day before it expired, leading to a worldwide dip. A crude oil futures contract is 1,000 barrels of oil. But it doesn’t get delivered to you in barrels. What you would actually need to do is essentially figure out a way to transfer it from the Cushing, Oklahoma storage facility. The people that actually do take physical delivery set up pipeline transfers or they purchase physical storage space at Cushing. They aren’t showing up with a truck at the storage facility.
Hopefully I didn’t burst your bubble. We do have strategies that use futures contracts, including crude oil. However, we’re not taking delivery of anything. I would recommend that you also avoid taking delivery of any futures contract, whether it is crude oil, soybeans, corn, wheat, etc. Also, negative oil prices will not be a normal occurrence so I would not recommend adding that strategy to your portfolio.
Leave a Comment