Ups and downs happen. There are good days and bad days. And then, there’s oil. A commodity so popular that it has basically driven a large portion of geopolitics for several decades, just had a confidence-crushing equivalent of throwing a party and nobody showing up:
Yes, that’s the price of oil falling below zero. Not just by a tiny bit but almost by negative forty dollars.
First, how does that happen? With stocks, they can go to zero but they can’t go negative. It’s not like you buy a stock in a company that goes bust and then have to pay someone to get rid of the stock - it just becomes worthless and, sort of, disappears.
But oil is a physical commodity. So, when people buy contracts, it eventually has to get delivered. In a functioning society, people sell this oil, get money, and deliver it to people who want it.
In a society where norms are fundamentally broken by a global pandemic, it’s not so simple. People aren’t leaving their homes - meaning very little driving, flying, or other fun methods of transportation. All those modes of transit need gas, which comes from oil. Therefore, demand is extremely limited.
While that greatly simplifies all the things oil is used for, the general point is that nobody really wants the stuff at the moment. That means for oil contracts expiring very soon where delivery of the physical asset is required, the usual system of paying to receive it doesn’t work.
Right now, all these producers have oil and no one is willing to take it. In fact, the people who may want it might not even be able to put it anywhere because their storage capacity is full.
For people who want to deliver oil when no one wants it, the market has come to a solution. They have to pay people to take it. And, that’s how you get negative prices.
Imagine that. It’s almost unthinkable what just happened. Oil, a commodity so precious its nickname is “black gold”, has no home. Because it has to be put somewhere eventually, it now has negative value. Buyers are literally saying, “Fine, I’ll take the oil but only if you pay me to do so.”
Now, oil isn’t really worthless - it’s just the current round of contracts expiring that are. People will use it eventually, so contracts for later dates are sitting at more normal prices.
But, the fact that this is happening, if even just for the very short term, implies something broken in the system. While there are a lot of explanations for this phenomenon (mine included), I don’t think anyone really understands the full picture of what is happening here.
I say that because until this happened, it was an unthinkable scenario. So, in my opinion, if something occurs that just a few days ago would've been laughed at as implausible, I don't believe there is a tidy explanation that captures the intricate nuance of the situation.
Until this confusing tangled web of oil prices gets undone, understood, and resolved, the simple stories and explanations are all we have. Maybe it’s the best we can do. Because, come on, seriously? Negative prices? What just happened is truly insane.