Today's crash and ETF pricing

[Bob_W + 37]

As promised, here's another dumb question.

WTI, according to OilPrice.com and other chart sites, is down 70%.

But WTI-based ETFs (USO, OILK, etc.) are down only 7%.  So for all practical purposes the reported $5 isn't 'real', or at least isn't accessible to brokerage traders.  It's related to the rollover of monthly contracts?  Are they tracking different months, making the charts an apples to oranges comparison?  Or perhaps the ETFs have a delayed reaction?

More illogical, oil and gas service company stocks that normally track oil prices are actually up today.  HAL, SLB, etc.

[Bob_W + 37]

Aha, I think I figured it out.  $4 oil is price for contracts that expire tomorrow and no one wants the **** things.

Using the CL00 Continuous Contract chart makes more sense.

[Jan van Eck + 7,558]

I susperct, but do not know, that you are seeing forced selling, due to margin calls. 

Lots of commodity contracts are purchased "on margin," with some portion of the contract settlement price being fronted by the brokerage firm, using the commodity lot itself as security for the trade.  If the price starts to slide, then the brokerage says to the speculator, "OK, hey there, you need to put up more cash or we will have to sell out your shares."  If the buyer is out of cash, or declines to put more money into the sliding commodity trade, then his contract gets liquidated, and if you have lots of these hitting at once, then the slide turns into a torrent. 

Remember that on the other side of each trade is a counter-party, who bought the trade (if you are sellling).  That counter-party is thinking that the market is headed for a rebound.  None of these guys wants physical delivery, they are in the trading b usiness, not the physical purchase business.  If those guys guess wrong, then the losses mount up fast.  there is a large oil trading house somewhere in the Far East that just collapsed, being upside down for $4 Billion (that's with a "B".   If you owe $4 billion to your bankers and all you have to show for it is some oil sitting on tankers headed for the USA which now has a value of maybe $1/bbl on a good day, then your bankers are in for a world of hurt.  those trades probably originally went for $22.  Ouch. 

Canadian oil, graded as Western Canada Select  (WCS) is now negative, bounding around from zero to minus $2.76.   No point in pumping it, and the oil sands are toast.  Bye-bye billions in investments in oil-sands extraction factilities.  Will oil-sands oil ever get re-started?  Not in the next ten years.  Looks like Justin Trudeau blew $4.5 billion on that Kinder Morgan pipeline with uncanny timing accuracy! 

Might as well go have a bonfire in the back yard with all your cash, at least you can cook up some hot dogs and marshmallows for it!  Today you whave wintessed something truly historic: the destruction of billions and billions of wealth, burned by speculators on the wrong sides of futures contracts trades.  Oh, well. 

[BLA + 1,666]

On 4/20/2020 at 2:11 PM, Jan van Eck said:

I susperct, but do not know, that you are seeing forced selling, due to margin calls. 

Lots of commodity contracts are purchased "on margin," with some portion of the contract settlement price being fronted by the brokerage firm, using the commodity lot itself as security for the trade.  If the price starts to slide, then the brokerage says to the speculator, "OK, hey there, you need to put up more cash or we will have to sell out your shares."  If the buyer is out of cash, or declines to put more money into the sliding commodity trade, then his contract gets liquidated, and if you have lots of these hitting at once, then the slide turns into a torrent. 

Remember that on the other side of each trade is a counter-party, who bought the trade (if you are sellling).  That counter-party is thinking that the market is headed for a rebound.  None of these guys wants physical delivery, they are in the trading b usiness, not the physical purchase business.  If those guys guess wrong, then the losses mount up fast.  there is a large oil trading house somewhere in the Far East that just collapsed, being upside down for $4 Billion (that's with a "B".   If you owe $4 billion to your bankers and all you have to show for it is some oil sitting on tankers headed for the USA which now has a value of maybe $1/bbl on a good day, then your bankers are in for a world of hurt.  those trades probably originally went for $22.  Ouch. 

Canadian oil, graded as Western Canada Select  (WCS) is now negative, bounding around from zero to minus $2.76.   No point in pumping it, and the oil sands are toast.  Bye-bye billions in investments in oil-sands extraction factilities.  Will oil-sands oil ever get re-started?  Not in the next ten years.  Looks like Justin Trudeau blew $4.5 billion on that Kinder Morgan pipeline with uncanny timing accuracy! 

Might as well go have a bonfire in the back yard with all your cash, at least you can cook up some hot dogs and marshmallows for it!  Today you whave wintessed something truly historic: the destruction of billions and billions of wealth, burned by speculators on the wrong sides of futures contracts trades.  Oh, well. 

"Lots of commodity contracts are purchased "on margin," with some portion of the contract settlement price being fronted by the brokerage firm"

 

Lots of Commodity contracts not purchased on margin. The selloffonday was a lot of shifting amongst headgefunds.

Over 100,000 contracts (1000 bbls each) exchanged hands. 

While many speculators invest in crude contracts they always settle before contract closing date.

The May contract closes tomorrow April 21st.

Many speculators (foolishly) speculated going long in anticipation of the Saudi/OPEC fake production cut of 10mm bbls. Oil always moved up when Saudis/OPEC announced production cuts or similar announcements.  Maybe the world has finally figured out all that talk was bull____.

Whomever holds the contract upon closing (tomorrow) must take physical deliver of the oil.   The (1) there is no demand from Trading forms, refiners, airlines, etc (2) even if you wanted to buy the oil and sell at a later date THERE IS NO STORAGE CAPACITY AVAILABLE AT CUSHING, OK.  The storage there is full or spoken for. 

So speculators that went long May WTI contract are stuck.  They can't take physical delivery and nobody want to buy their contracts.  

The ETFs sold their May contracts several weeks ago.  They only hold out months and roll over to the out months as the months progress. 

We probably will see the same rout upon June contract expiration on May 19th as we are seeing now. 

It's going to take a long time for crude to come back. 

Time to start looking at going long pure play refiners who should come back with good margins sometime in the second half of the year.  

 

Edited April 21, 2020 by BLA