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Comment by KSteffensen | Hacker News Reader

Wasn't the crude oil price negative a year ago? What happened?

There was a small decrease of light sweet production during the downturn. When the use rebounded, OPEC voted to keep production growth behind use growth. This helps nurture our steadily rising prices and reduce the chance of blowback from suddenly skyrocketing prices.

At the same time Louisiana production took a hurricane hit and that helped reduce supply a bit more.

Crude oil futures were negative for a single day (if my memory serves me correctly) a little over a year ago. The holder of the contract at its expiration has to make arrangements to actually receive it -- you were getting paid to take oil that was very hard to move and very hard to do anything with at the height of the pandemic.

Obviously, the future where nearly all consumption stopped and everybody stayed in their house for the next 3-5 years didn't happen. The opposite did, and the pricing reflects that.

The negative price was caused by all the storage tanks being full. If you've got no storage you can't take delivery so you have to pay someone to take the oil off your hands.

Russia and Saudi Arabia stopped fighting a price war with each other and the COVID demand slump is coming to an end.

Briefly (like, minutes to hours) and for very specific structural reasons. Negative oil prices were never an accurate reflection of the actual supply/demand equilibria for oil.

Commodities trade at the margin, because there are many times more futures contracts than actual deliveries, but the people that actually take delivery and need these commodities to run their operations, will pay whatever price necessary to get them and not stop production. The effect of this is to make the markets extremely volatile.

The last sentence is not true. The whole point of a futures contract is to hedge risk and allow price discovery. It is true the companies consuming commodities will buy at almost any price but more active trading results in a price more closer to fair market value over time. It’s the same reason why prices for rarely sold items fluctuate widely between sales. There’s no activity to visibly show the change in demand or supply in between.

>The last sentence is not true.

Is that so? In theory, derivatives like futures can increase the efficiency of market clearing. Nevertheless, it is apparent that the price of oil is many times more volatile than the price of downstream finished goods using oil.

Yes and it's precisely because futures and forward contracts are being used that is possible. If it wasn't then market uncertainty and fluctuations in the economy would be more instantly reflected in prices of the end user products consuming those commodities. With hedging now you can focus on margin and operations which is the whole point of your business, not predicting the global economy.

demand went back up.

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