Who Would Have "Thunk" It?!

We actually have a client, someone quite knowledgeable in the world of alternative energy who predicted (in our conversation a few years back) that oil prices would go to zero at some point in time in the future (he also owns gold because he is a little skeptical on the value attached to fiat currency) . I am not sure that he saw what happened in the oil futures market yesterday coming, necessarily, and the reason for it, but... if you are right, you are right (regardless of the "why"). I can't help but think of the Clampett's and Ewing's and all the other TV oil shows and movies that might not have seen this eventuality!

How do prices get negative?

In the futures markets, where commodity producers can hedge their prices and commodity buyers can make purchases to avoid the uncertainty that price movement brings (and speculators can do either if they see a chance to get in the middle and make some $), few ever expect to actually take delivery of the actual product. They either buy / sell an offsetting contract (to cancel the original) or "roll" the contract into the next future expiration date. A kind of musical chairs, if you will. For a pretty good explanation in relatively easy terminology read: There’s Nowhere to Put the Oil.

With oil demand off some 30%, on the back of the coronavirus pandemic and subsequent lockdowns, the expiration of the May contract got a little tricky. Perhaps some airline who suddenly realized that the were not going to be able to roll their futures contracts (airlines would need a natural hedge against rising fuel prices in normal times, to estimate costs, etc.) and feared having to take delivery with nowhere to put the oil and were scrambling to get rid of their contracts, hitting any bid in sight, even bids that had a negative price. Which translates into, "here take a free barrel of oil and I will also give you $40 to take it off my hands, 'cause I have nowhere to put it!"

Anybody have an empty swimming pool?

If only we could lock in future gas prices on the back of that!

The Bank of Canada's inflation projections just went a bit squirrelly too.

The point here is, we are in unprecedented times. Anybody who says that they see how this whole pandemic situation is going to play out has been participating in some of the 17% increase in marijuana sales since the lock-down began.

There will be a "new" normal, but what that is remains to be seen. If the oil price fiasco is representative, we are going to be in for a wild ride.

Hang on!