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Oil is not dead yet. But the trend of consuming oil is clearly down:
According to CNN - consumption world wide in April 2019 was 100 million barrels/day and in April 2020 just 71m barrels/day. *
Conclusion:
USA became 2019 no 1 in oil production in front of no 2 Russia.
As long as the production does and will not follow lower consumption demand, the price of oil will stay around zero. With this the production countries will be measured by stable quality and price. As a result some of the "bad" producers will no longer be in the market - especially the fracking boys: This will be intermediately good for all other oil states getting better market prices.
To sum it up: the price war will have several losers but USA will be hurt the most.
Instead of giving my opinion on op's question I better state that speculation on oil and its derivatives should be limited by laws. Helping to get the pressure out of the kettle.
Production cuts go into effect May 1st. As U.S. states and other countries come out of lockdown demand will rise. Price then will follow.
We are not going off oil anytime soon. Probably 20 more years of it at least. All those who say we are ending use of oil are full of .... and not living in reality. Look outside the bubble you live in. There is a great big world outside it with all kinds of other people with other opinions and other needs than your own.
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That's an interesting perspective would you care to elaborate more? Do you feel the same about other commodities? Also how do you define speculation?
I do think events like Monday were caused by excessive speculation, but not sure how you should temper that.
Oh I disagree. Since we are quickly approaching maximum storage I don't think production declining and supply returning is relevant UNTIL demand exceeds supply again. As long as supply exceeds demand and storage is full I see no reason with the incremental barrel of oil shouldn't be worthless. (That doesn't mean every barrel is worthless). I think as we approach expiry June will go the same way May did.
I don't disagree. My comment in regards to demand was longer term. Obviously with areas just starting to reopen demand is not going to come back pronto.
It will take time but it will be there sooner (many months) than later (many years). IMO.
I also am curious what the other poster is thinking about excessive speculation of oil - the number one commodity traded in the world.
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Yes by spot oil prices I refer to Crude Oil/WTI crude spot prices as well as Brend Crude spot prices. But yes there is other references like Dubai Crude as well and other - I am not only refering to US related Oil spot prices - How ever the 2 largest international references are WTI Crude and BREND Crude (North sea oil)
Which translate into the oil deriviates CL at NYMEX and T and BRN on ICE.
_ The spot price of a commodity is the local cash price for immediate delivery of the commodity.
_ The futures price locks in the cost of a future delivery of the commodity.
Brent Crude or Brent Blend (not Brend) is a North Sea Crude, which loads at Sullum Voe in the Sheltland Islands, Scotland. Brent Futures USED TO BE based upon Brent but as Brent production declined they switched the underlying crude to the BFOE basket while maintaining the Brent name. BFOE stands for Brent, Forties, Oseberg and Ekofisk which are the four major crudes in the North Sea. So what people call Brent actually is no longer Brent. Brent and the BFOE basket is the largest global benchmark in the world. Nearly all European, African and many middle eastern barrels trade at a differential to (dated) Brent. The Brent market consists of three major products. Obviously there are Brent Futures which trade on both ICE and NYMEX, although the NYMEX BZ contract is just a ICE copy cat, just like ICE WTI is a copy cat of NYMEX Light Sweet (aka CL). Brent Futures settle financially against the BFOE index. Then there are Forwards which typically are 500,000 barrel contracts for specified delivery months. In forward months their value is almost identical to Brent Futures, but the big difference is that Forwards eventually become physical cargoes by a process called "Passing Dates". Then there is 'Dated Brent'. This is spot Brent. It represents the value of cargoes that have been assigned loading dates. 'Dated Brent' and not 'Brent Futures' is what physical cargoes price off. There is an enormous 'Dated Brent' derivatives market most of which is quoted as a differential to either the Forwards Market (called CFDs) or the front month futures contract (called DFL or Dated-Front Line) and not as an outright price. 'Dated Brent' price assessments are performed by a company call Platts which is part of S&P. Dated Brent is currently trading several dollars below prompt futures and hit a long time low of $13.24 this week. Remember Brent is a very light and sweet crude, less desirable crudes trade at a multi dollar discount to Dated! *
WTI or West Texas Intermediate is another very light and sweet crude very similar in quality to Brent. It's predominantly produced in West Texas (hence its name) and is piped to Cushing OK and to the Gulf Coast (Houston & Corpus Christi). Most people incorrectly believe there is a WTI futures contract. NYMEX even occasionally incorrectly refer to it as WTI themselves. In fact NYMEX list a 'Light Sweet Crude Oil' Futures contract symbol CL. That contract is subject to physical delivery and there are a list of crudes that you can deliver into the contract at Cushing OK which includes WTI and Brent. I believe that WTI is the only crude that is delivered at 'par', and obviously in normal circumstances is the only crude delivered. Hence why it is often incorrectly referred to as WTI and not Light Sweet Crude. This didn't use to be the case though. Brent used to come across the Atlantic, to the Gulf Coast where it was pumped to Cushing OK and delivered against the contract. Of course that was when CL was the world benchmark representing one of the most expensive crudes in the world (and traded at a premium not a discount to Brent). Fundamentals have changed though and as we all know that is no longer the case. So what is spot WTI? The way physical WTI is traded is very different between producers and gatherers and between traders. A small Producer will sell their production to a gathering company at a differential to that company's Posting Price this is called Posting Plus of P+. You can see Plains Resources Posting Prices for April 20th here. As you will see Plains posting price was NEGATIVE $41.17. That means producers selling to Plains received a negative price on Monday. This is spot physical WTI. So you assertion that spot prices have never gone negative is wrong. You will also see that 'Eastern Kansas Common Special' priced at MINUS $55 on Monday! That makes WTI look expensive! Traders trade a calendar month forward (physical delivery product) that is very similar in price to the NYMEX CL contract. If ever it isn't they can arbitrage the two. WTI physical prices are assessed by a company called Argus (used to be Platts as well but they lost that monopoly). This is why I asked you if you were saying that Argus's May WTI assessment stayed above $10 on Monday which would be a $47 differential to the futures price. I do not have access to Argus Assessments so can not answer but am very confident it was close to MINUS $37. Note that Argus have an assessment for WTI at Houston TX, Midland TX as well as Cushing OK. You will see significant difference in those quotes with WTI Houston being the highest and something the correlates more with Brent and than WTI. **
Dubai is the benchmark I know the least about. Unlike Brent and WTI it is a Medium Sour crude. Meaning when refined it yields less high end products (gasoline, jet, diesel) and it's products have a bigger sulfur content. It does not posses the pricing power of Brent or WTI and is used mainly for pricing middle eastern crudes going to asia. I believe that Oman has partially replaced Dubai in its capacity as a Benchmark.
Then there is Tapis! Tapis is a light sweet crude like Brent and WTI from Malaysia and is used as a pricing benchmark for sweet crudes in Singapore. And that is about all I know about Tapis!
Since I'm preaching, does anybody have any questions about crude oil markets that I can attempt to answer?
* My first job out of college was working for a major international oil trader in London and my second job within that firm was on the crude desk which specialized in trading North Sea, West African, Russian and Middle Eastern Crudes.
** When I moved to the US I was a crude oil swaps market maker for a large US energy company which had their own P+ business. I was also head of oil derivative trading for another US energy company that owned several North American refineries.
About liquidity in markets and how to look at speculation
Here some thoughts about the the questions from @SMCJB
• Liquidity
What happened on Monday when brokers did not let futures trader price into negative - suddenly the liquidity in the markets ended. Sellers could not place orders and buyers the same. So the market did not exist any longer like it was frozen. Only some members in the markets that had the possibility to still trade dictated the price over that red line of ZERO.
This shows that markets treat offer versus demand as long as ALL parties are allowed under similar conditions to trade the same commodity. Any intervention (like a "no negative rule" is poison for the liquidity - means vola might go up erratically while volume shrinks.
How can markets be tempered (by law or decision from the broker)?
There are many possibilities: • Margins
- day and overnight level for futures - means that when the home market is closed but worldwide price moves influence the home future in direction of the comparable open markets. This stears a trader to stay away from the market or to limit his open position(s) because of his limited financial cushion. So as example IB doubles the overnight margins thinking of a rare occurrence to hit this during overnight or weekend hours. • Spreads
- Low spreads lead to more trades. Means for some brokers to make more money even with small positions or lower multiplied instruments. This is also a good ground for hft (high frequency automatic) trading. Growing spreads are gearing to less trades as well as lower wins/losses on every trade. Therefore a trader needs to have a "better" system to survive in the market with all side costs given.
• Speculation
I like to distinguish between insurance trading and speculation trading: Insurance trading is for a producer aka selle of goods to have a certain price guarantee AFTER a time span when he can sell his products - therefore the name "future" which is a price for the product that moves to the day-price while going towards the end time of the contract. Vice versa for the buyer of a product to have stability of a price in the future. Speculation trading is done on real futures as well as the derivatives of the same product (of course with different multipliers and costs) which is done by traders that are just hiding for price difference but never will sell or buy the traded product. That is a much bigger volume than the trades for the "real world".
What can intervention by state and law do?
- making margins higher by law to prevent from high vol trading markets which may lead to print even more money to support liquid market which leads to inflation under stable market conditions.
- forbidding some products or shrink them. Especially derivatives on worldwide needed goods and in extremis for food water and pharma products.
- nationalization of certain industries which will control important national goods and connected markets.
- disable all trading markets to concentrate just on bid and ask between 2 parties.
- taking out money (real or virtual) as a part of a trade - means goods for goods as in the past.
Of course not was a free market and trading between many traders and countries around the world means. But that reality happens every now and then when borders are closed or war is on.
Just some thoughts to a theme that shows how vulnerable today's online possibilities mean for everybody.
GFIs1
PS: Speculation is a good energizer for rising markets. Higher markets are not a priori saying there is more money or value at hand. I don't see speculation a high risk even for most important commodities. It is just a thing for a trader: "I will do it because I CAN". As long the virtual markets work there will be a market for virtual aka speculation trading. But if the plug is pulled a real implosion will happen instantly.
