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How much will you pay me if I take your oil?

Summary:
This in not something we see very often-a negative price.See U.S. Oil Costs Less Than Zero After a Sharp Monday Selloff: Many traders are betting that the coronavirus pandemic will run its course and demand for oil will jump later this year by Ryan Dezember of The WSJ. "U.S. oil futures plunged below zero for the first time Monday, a chaotic demonstration of the dwindling capacity to store all the crude that the world’s stalled economy would otherwise be using.The price of a barrel of West Texas Intermediate crude to be delivered in May, which closed at .27 a barrel on Friday, ended Monday at negative .63. That effectively means that sellers must pay buyers to take barrels off their hands.The historic low price reflects uncertainty about what buyers would even do with a barrel

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This in not something we see very often-a negative price.

See U.S. Oil Costs Less Than Zero After a Sharp Monday Selloff: Many traders are betting that the coronavirus pandemic will run its course and demand for oil will jump later this year by Ryan Dezember of The WSJ.

"U.S. oil futures plunged below zero for the first time Monday, a chaotic demonstration of the dwindling capacity to store all the crude that the world’s stalled economy would otherwise be using.

The price of a barrel of West Texas Intermediate crude to be delivered in May, which closed at $18.27 a barrel on Friday, ended Monday at negative $37.63. That effectively means that sellers must pay buyers to take barrels off their hands.

The historic low price reflects uncertainty about what buyers would even do with a barrel of crude in the near term. Refineries, storage facilities, pipelines and even ocean tankers have filled up rapidly since billions of people around the world began sheltering in place to slow the spread of the deadly coronavirus.

Prices remain in positive territory for barrels to be delivered in June. In the most actively traded U.S. futures contract, crude for June delivery lost 18% on Monday to close at $20.43, while oil due to be delivered to the main U.S. trading hub in Oklahoma in November ended at around $31.66.

Those higher prices, like the recent surge in stocks, reflect investors’ optimism that the global economy will bounce back later this year, and that sufficient demand for fuel will return to soak up some of the glut that was building even before borders closed, factories idled and billions of people stopped driving and flying. Yet prices around $30 a barrel, which is below break-even for many producers, still suggest economic worries ahead, some analysts say. “It’s absolute bedlam,” said Chris Midgley, director of analytics at S&P Global Platts. “I hate to hear who’s on the wrong side of this.”

Monday’s trading was exacerbated by the looming expiration of the May futures contract on Tuesday. The price of oil futures converge with the price of actual barrels of oil as the delivery date of the contracts approach.

Contract expiration also flushes out speculators who have no intention to take delivery of barrels of crude. Exchange-traded funds, which control a large number of futures contracts, are among those that must sell at expiration. The forced selling adds downward pressure to prices."


Here is a Futures Market Example from Investopedia. The basic idea is that if you are selling a commodity like grain or oil, you want to avoid the risk that the price will be low when you finally get your product on the market. So an investor or speculator agrees to pay you a price that you are satisfied when your commodity comes to market. If the market price is lower than what your contract with the investor calls for, you still get the agreed upon price. If it is above the contract price, the investor gets the extra amount. You, as, say, a farmer, might not make as much as you could have but that is an insurance against a very low price. You can never be sure what the price will be in the future, so you are willing to agree to this keep from getting wiped out when things go bad.

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