One commodities trader, who spoke anonymously because he was not authorized to talk to the press, said that having a contract execute is generally considered to be very, very bad. Traders are “taught on day one to never let these futures go to settlement. Because then you’re stuck with 1,000 barrels of oil and you have to find someone to take it for you.” When the economy isn’t collapsing, these contracts ultimately end up with an airline or a refinery or an energy company or companies like that.
Normally, selling a contract isn’t a problem because America uses a shitload of oil, which means there are usually lots of oil buyers. But with everyone driving and flying less because of the coronavirus pandemic, demand for gasoline, petroleum products, and other refined oil products has plummeted. So big physical oil buyers such as airlines, refineries, and a host of other industries aren’t buying as much oil as they used to. But production has not slowed down. Russia and Saudi Arabia have flooded the oil market in recent weeks, and America and Canada continue to produce oil from our various onshore and offshore wells.
There are a few problems that have caused the price to plummet:
- No one wants to buy oil
- There is nowhere to put the oil
- May’s futures contracts are set to execute at 2:30 p.m. Eastern time today
What this means is that a bunch of oil speculators who have no infrastructure or capacity to handle tens or hundreds of thousands of gallons of oil have a few hours to figure out what they’re going to do with the oil contracts that they bought a long time ago. It’s kinda, sorta like putting in a fake bid for a rare gem at auction and getting stuck with it, except in this case the thing you’re getting stuck with is hundreds of thousands of gallons of a poisonous pollutant. And so you have a bunch of people panic-selling oil for whatever they can get, which in this case means they are paying people to take oil so they don’t have to take it themselves.
What’s happening right now is an anomaly, combining a usually routine monthly contract-execution deadline, a messy commodities market, geopolitics, and coronavirus, but also something like a cartoonish version of the market working as it usually does.
“Weird things always happen when the contracts expire,” Stetzer said. “But this is an extreme scenario.”
Just for reference, the types of companies that normally have the ability to take and store oil are companies such as Morgan Stanley, Glencore, Vitol, as well as some oil refinery companies. These co