oil at $10 a barrel

In my early stock market days, one of my bosses sent me on a tour of commodity-trading centers to get me up to speed on palm oil.  This was so I would understand the plantation stocks in Malaysia.  I mentioned to one head of trading I spoke with that my trip was part of a months-long project.  He looked at me like I was an idiot and slowly (so that even I could understand) explained that commodities were all about gut instinct and decisive action.  He hired good high school athletes, not scholars.   A classic jock vs. nerd confrontation.

This is to say that I’m not a commodities expert.  So maybe you should take my comments about crude oil with a grain of salt.  Anyway,

–crude for May delivery plunged over the weekend to right around $10.  On Friday April 3rd a barrel was going for $28+

–the main reason is that oil production is still miles ahead of oil use and there’s no easy way to store excess crude oil output

–this is an epic low in inflation-adjusted terms.  Saudi crude sold for less than $3 a barrel in dollars of the day in the early 1970s and rose to close to $30 in 1979-80, before plunging to $8 (about $27 in today’s dollars) in the recession that followed

–there would be an arbitrage opportunity if there were storage, since crude for August delivery is trading just under $30

–this is where my not knowing oil trading hurts:  I would have expected that future months would have collapsed in line with the current month.  I read this as traders thinking the May situation is a temporary blip, but I really don’t know

–for many years natural gas has sold at a substantial discount to crude, on a heating value basis.  Today they’re roughly equal.

my stock market take

The oil market is saying this is a temporary blip.  I’m not so sure.  But I don’t know.  And the energy sector is so small that I don’t need to do any more than observe.  So I’m going to sit on my hands.

If it persists, this situation is very bad for third-world countries like Venezuela or Russia that are radically dependent on oil.  It’s also not good for the oil countries of the Middle East, which have similarly one-dimensional economies.  They can likely continue to produce at a profit even at today’s price, but I’d expect that their governments would be forced to begin to liquidate their foreign investments as budget deficits soar.  This could have a negative effect on global stock and bond markets.

The largest effect on the US is a redistribution of wealth away from the big hydrocarbon-producing states to the consuming ones.  In theory, this should be an overall wash.  But since there’s very little discretionary driving going on, I think it’s a mild negative.

The price fall is good for the EU and most of Asia.

The US stock market is flattish, despite the oil price.  Both NASDAQ and the Russell 2000 are up slightly, suggesting that neither industries of the future and small business will be hurt by lower oil.  Even the Dow, which is showing its deep roots in industries of the past, is only down by about a percent.

An addendum (stuff I just found out):  the May crude contract expires tomorrow.  The holder is required to take physical delivery of 1,000 barrels/contract.  The price shows virtually no one wants to do so.  Apparently, it’s not clear whether storage will be available on settlement date.

contract closing:  the May crude oil contract closed today at minus $37+, meaning that the seller had to pay the buyer $37,000 to shoulder the burden of taking delivery of the 1,000 barrels each contract represents.  The buyer gets the oil plus the money.

 

 

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