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STOP BEING NEGATIVE

Last month: "Oil prices are so low, but this too shall pass..."
Monday: "Hold my beer."

Yesterday an oil futures contract that expires today made history by dropping over 100% and falling below zero dollars. Let that sink in. The oil benchmark West Texas Intermediate (WTI)’s futures contract for May delivery closed yesterday at negative $37.63. This has never happened before. For context, it wrapped up Friday at $18.27 per barrel.

Is that bad?

It is if you’re an oilman.


The economy is at a stand still and oil markets are facing a collapse in demand. Nobody is driving, flying, or doing anything that involves gasoline... although lighter use rose dramatically yesterday, as expected.

The drop in demand at the pump and for jet fuel means refiners are producing less. In turn, upstream oil drillers have nowhere to sell their liquid gold and the storage facilities (think of it as the shed out back) are near capacity.

In short, nobody wants the oil because there’s no place to put it. And there’s no place to put it because nobody wants it.

And there was plenty of collateral damage. Oil’s decrease brought stonks down with it. The Dow fell over 2.4%, while the S&P and Nasdaq fell 1.79% and 1.03%, respectively.

Mr. Brightside


Further dated contracts indicate that it’s not all bad. June’s contract, which fell 18%, is still above $20 per barrel at $20.43. July’s contract, having fallen roughly 11%, is standing at $26.18.

So why are other futures contracts fairing so much better? Mostly because delivery takes place further in the, for lack of a better word, future. May contract holders are mostly refiners and airlines which, at one point, actually wanted to take delivery of the fossil fuel. But with demand low and reserves full they are literally paying people to take it off their hands...

The bottom line...

While the future seems about as bright as Exxon Valdez crude covering one of those cute AF ducklings, there is reason to be optimistic. You, for one, can probably fill up the RAV4 with spare change.

And if you’re an oil trader and can grit your teeth in the short term then you may stand to make a pretty penny. In 1990, facing contango as well, Salomon Brothers' (RIP in peace) oil trading arm loaded up tankers with crude just prior to Iraq invading Kuwait, which resulted in crude prices surging and a $100M payday for its trading architect Andy Hall.

Oil futures go negative, drags markets down. [Bloomberg]

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