Oil Prices Were a Beautiful Mystery
Also ETF rebalancing, brothers-in-law, negative rates, lunch value investing and Bitcoin hacking.
On one level, I feel like I can explain why the price of West Texas Intermediate crude oil futures for May delivery was negative $37.63 on April 20. The most basic explanation, which I offered shortly before the price actually went negative, is that most people who buy oil futures do not actually want to take delivery of 1,000 barrels of smelly toxic explosive goo, and if you are long May futures at the end of April 21, you are going to get a delivery of oil. There is not much demand for oil right now, what with the collapse of the global economy due to a pandemic, and oil storage tanks near Cushing, Oklahoma—which is where you’re getting the oil, if you own those futures—are pretty full. So everyone who was long abstract oil via futures on April 20 tried to get out before it turned into real oil, nobody wanted to buy, and prices collapsed. Oil storage isn’t free, and oil isn’t that valuable if no one is driving or flying, so if you had oil and wanted to get rid of it, you had to pay someone to take it off your hands.
That’s fine as far as it goes, but it’s not wholly satisfying. We are talking about one day. On April 17, the trading day before April 20’s collapse, the May futures settled at $18.27. On April 21, the final day of the contract, they settled at $10.01. Not all that much changed over that period; it’s not like the demand for oil was robust, or lots of storage was available, on April 17 and 21 but not on April 20. If you wanted to get out of the May contract before taking delivery, you could have done it before the last possible minute, to avoid a rush to the overcrowded exits, and in fact most big financial oil investors (exchange-traded funds, etc.) did get out of the May contract by April 17, at normal positive prices. But if you insisted on waiting for the last minute, you were also fine; the contract settled at a positive price on its last day. A huge rush of panic selling on the second-to-last day, preceded and followed by relatively orderly trading at normal prices, is … possible, but unsatisfying.