THE BRIEF

On April 20th something very unusual happened. The oil market collapsed and the price of oil plummeted 300% to -$40 per barrel. That’s right, oil traders were willing to pay $40 to give buyers a barrel of oil. As crazy as this sounds, oil is projected to crash again. Oil supply continues to grow as oil storage fills up around the world. Even after reaching a record cut to oil production agreed by global oil producers, oil prices continued to sink.

In short, sellers were willing to pay people money to take their oil contracts to prevent legal issues. The price of oil is determined by a futures contract which enforces a person to buy something at a predetermined price and date. A standard oil contract delivers a minimum of 1000 barrels of oil and is a “physically delivered” contract. This means, if you own the contract on the date written on it, you are actually required to receive physical barrels of oil. However, majority of traders profiting off oil do not actually want to receive a barrel of oil in their wall street offices so they sell the contract before expiry. These traders were willing to sell the contract they own at a negative price to avoid a lawsuit for failing to take delivery at the expiration date.

WHAT DOES THIS MEAN FOR YOU?

For those that think you can convince oil companies to pay you to take their oil off them, sadly you can’t. If you see the price of any commodity going into the negative territory remember that this reflects the price of the contract, not the actual commodity. Be wary before deciding to jump in (unless you own your own oil tanker or warehouse) – it is unlikely you will own the exposure you thought you owned.