I asked why they weren't prepared on Friday. Storage has been expensive and getting more expensive for weeks. We've been in a massive contango for weeks. Why weren't they prepared on Friday for physical delivery?
The sellers were looking to sell for most of last week, however there fewer buyers as the contract approached its end, and those who were willing to buy wanted a lower price:
Volume of transactions on Friday was 344k, Thursday was 111m, Wednesday was 147m. In the past 30 days, the low was 686k (ex Friday), and the high was 459m. Traders slowed their buying so the market became one sided.
In short, the reason nobody anticipated it is because the future is unknown. The reason any market is unpredictable is because there are too many variables to account for.
I'd imagine people just assumed perfect liquidity here, and that they'd be able to sell even "at a small loss which is better than nothing," not realizing that nothing or negative (i.e. you're gonna pay somebody to take this oil off your hands or build your own tanks) is a valid outcome.
too bad the oil market is ... viscous.
Correct me if I'm wrong, but: The people doing the trading are middlemen, and have no capacity period. They expected to be able to sell it all off to the energy companies, even at a loss, so they normally don't accept any physical product. But the energy companies ran out of capacity - something the middlemen (traders) don't have direct knowledge of - so got caught unexpected with contracts they can't sell, and now have to accept the physical product.
US companies don't want to stop producing oil. Couple that with the Russia/Saudi Arabia skuffle going on over oil prices, I'm not surprised. What surprises me is the absolutely rapid/rabid decline in the price. It just seems like pure insanity to me...
Indeed, it looks like the US is reconsidering:
President Donald Trump said Monday the U.S. is "looking to" add as many as 75 million barrels of oil to the Strategic Petroleum Reserve. Trump spoke after an historic day in the oil CL.1, +103.61% markets, in which the May WTI crude contract closed at -$37.63 a barrel, a one-day drop of 306%. Trump said he was considering the move "based on the record low price of oil," and that the action would "top it out." Speaking at a White House press briefing, Trump said, "we'd get it for the right price."
https://www.marketwatch.com/story/trump-says-us-looking-to-a...
Because despite the people that like saying all future events are reflected in current prices, the fact is humans, both individually and aggregated into markets, are imperfectly prescient, thus future events are basically never perfectly priced in to to current market prices.
People say things to the effect of “if it is going to happen, it is already priced in” all the time, on HN even.
> All KNOWN future events are priced in.
There are no such thing as known future events. Market participants estimation of the likelihood of future events, weighted by inclination and capacity to invest, are priced in.
-Former dumb oil trader
+1 just for admitting it. :)
By definition, you’re looking at the price for people who wouldn’t want to play, if they could avoid playing. They are literally over a barrel. If they don’t get out, the broker gets to screw them even worse at the deadline.
Volume was up, because some people were going through heroics to close their position at all costs.
But the end of day price is for those who got screwed: the truly unaware who didn’t realize they were out of time, or didn’t think about it going past $0. It’s probably relatively few people, despite today’s volume. When you lose control, someone agrees for you that you’ll pay $37/bb to get out.
https://thedailywtf.com/articles/Special-Delivery
I've no idea if it is true, but it makes for a funny story at least.
Most oil traders just want to profit off price movements and not actually own physical oil. There’s no volume on May contracts now they’ve all moved on to June.
I have not been involved in chapter 200 operations but I've heard socially this occasionally happens relating to substandard product. "We agreed on light sweet crude in the contract but you tried to deliver sour tar". The exchange knows its all going to get dragged into court eventually, so they try to be fair and transparent and well documented. There are plenty of people renting tank space as a normal business operation.
I don't think you're going to get Force Majeure protection. That's for something neutral to all parties like a hurricane, not one side of the contract didn't feel like closing out and doesn't have tank space lined up.
Prices didn't crash until this morning. Nobody was taking much of a loss before then.
What, exactly, do you expect them do to "prepare"? Friday they had more time to unload the contracts, and today they have less.
Sell futures on Friday, buy today (to close out the position). Profit from the predictable price difference.
But no one expects perfect predictions far into the future.
(Short-) sell last Friday, buy today at about 0 to close the position.