Tuesday, April 21, 2020

Oil falls below $0.00 for the first time ever

Something happened yesterday that I expected would never happen, oil dropping to or even below 1998 levels of $10-$20 a barrel.*  In fact, it fell so far below that price that people holding oil contracts had to pay others to take it off their hands.  CNBC has the story yesterday in Crude settles at -$37 a barrel in worst day ever.

Oil goes negative for the first time ever. Now what? With CNBC's Melissa Lee and the Fast Money traders, Guy Adami, Tim Seymour, Karen Finerman and Dan Nathan.
Wow, do her guests love Melissa Lee!  On a more serious note, my understanding of why oil fell to negative levels is that the people and institutions holding the oil contracts would actually have to take possession of the oil when the contracts came due.  Since they were only doing it for an investment and not for actual consumption, that's not what they really wanted to do.  They needed to get rid of the oil to someone who could store it until it's refined and used.  The problem is that there isn't much storage left as people aren't consuming oil to move around, so they had to pay people to take the oil instead of selling it and getting the money.

I'm an example of people driving a lot less and reducing consumption.  In January, I expected to write the next driving update in early April.  It's now late April and I've driven so little since Michigan colleges and universities suspended in-person classes in March that I may not write that update until June.  The silver lining is that the coronavirus response has reduced air pollution.  The bad news is that unemployment is up dramatically, which will reduce consumption in and of itself.

Follow over the jump for a more entertaining and professionally produced version of the explanation I wrote along with what the lower oil prices mean for consumers and a footnote.

I've only used a clip with Jim Cramer of CNBC once in Part of the yield curve inverts, sending a possible recession signal — wow, did that ever come true!  As I wrote then, "I'm not a fan of Cramer's, as he tends to be too bullish and emotional."  Normally, I find those annoying.  However, when his emotionalism is decoupled from his optimism, I find him not only tolerable, but entertaining.  Watch the following two clips from CNBC's Mad Money, the first I've ever embedded here.

Cramer opened his show with Jim Cramer: The oil market is 'emblematic' of everything that's wrong with the economy.

"The main takeaway from today is that our economy remains closed. And when an economy is closed … you don't need a lot of fossil fuels," the "Mad Money" host said.
He's right, it's the COVID-19 pandemic that's doing this and things may not return to normal without a vaccine.  Until that happens, the economy will remain depressed.

The expert Cramer mentioned in the segment above appeared in RBN Energy CEO breaks down the meltdown in the oil market.

RBN Energy CEO Rusty Braziel explained why negative oil futures prices, a first in history, represent a "paper market problem" as travel demand reaches near halt.
All of the above look at the utter collapse in oil prices from the perspective of investors.  Most Americans, including most of my readers, are consumers, not investors.  WOOD-TV looked at the issue from the consumer perspective in GasBuddy: What negative oil trading means for you.

Oil prices plunged about 300% Monday, trading around negative $30 per barrel in the late afternoon.
Patrick De Haan of GasBuddy said two major things.  One is the collapse in oil prices will lead to oil company bankruptcies, which will decrease competition and lead to higher prices in the future.  The other is that the drop in crude prices may not fully translate to lower prices at the pump.  Well, it's still leading to lower prices, as GasBuddy's own site pointed out in a front page article.
At the nation’s gas pumps, prices extended their downward move in every city and state. Over 120,000 gas stations are selling gasoline under $2/gal today, with nearly 40,000 stations under $1.50/gal. The most common gas price across the country stands at $1.69 per gallon, down 10 cents from a week ago, followed by $1.59, $1.79 and $1.49. The average cost at the priciest 10% of stations stands at $2.78 per gallon, down 7 cents from a week ago, while the lowest 10% average $1.19 per gallon, down 5 cents from a week ago. The median U.S. price is $1.69 per gallon, down 5 cents in the last week and about 9 cents lower than the national average. The Great Lakes continues to be a hotbed for the nation’s best priced gallon, with Wisconsin taking the title for lowest statewide average by a blow-out 15 cents a gallon compared to second place Oklahoma.
Time for the return of Limbo Kitty!

*I'm being a good environmentalist and recycling for this footnote.
$10-$20 oil?  That's the range in which the investment strategy of Mike Alexander's that I mocked in the footnote to Two years on, the stock markets are still setting records will work.
In 2003, he thought oil would return to 1998 levels within a decade and devised an investment scheme based on that prediction.  I told him that would never happen and that he shouldn't include that in his next book.  His response was that it only had to work once.  I told it would only work once if he was lucky.  After a dozen years, I'm still right; oil prices never dropped that low again.
I decided to acknowledge I was finally wrong and admit it to Mike.  Here's the Facebook message I sent him.
Congratulations, the situation I told [you] would never happen, oil dropping to 1998 prices, just occurred today.  You said it only needed to happen once and I responded that it would only happen once.  Well, that one time is now with oil settling at negative prices.  It only took 17 years.  So, ready to buy drillers?
*Snork*  I couldn't resist.

Stay tuned for Earth Day.


  1. I have a Boat Buddy, (a boat buddy is a fellow boater who you keep seeing at a seemingly regular basis while cruising), whose entire retirement portfolio is tied into oil. He is stuck in quarentine in Canada while his boat is beside our in Guatemala. I don't know how he copes.

    1. Oil companies are a better bet than physical oil right now, but wouldn't know how he's coping with the situation either, the stock market, the pandemic, and being away from his boat.