Slip sliding away. Stocks slipped yesterday as crude oil supply buildup caused prices to hit historic lows. The price of West Texas Intermediate crude oil fell into negative territory for the first time in the history of the futures contract.
N O T E W O R T H Y
Oil you need is love. If you didn’t see it here first, you probably saw the headline that the price of crude oil fell into negative territory yesterday. Yes, crude oil fell to -$37.63 per barrel. Beyond your shock, you are probably wondering how something can have a negative price. If so, here is the explanation. First, let’s clarify what it is that is for sale. West Texas Intermediate crude is a grade of crude oil known as light sweet crude (light because of its viscosity and sweet because of its sulfur content) which comes primarily from the Permian Basin in Texas. The crude oil is pumped out of the ground and then moved via pipelines to the Gulf of Mexico or the midwestern US to be refined. Most of the crude ends up in Cushing, Oklahoma where there are vast fields of storage tanks. Refiners purchase crude oil and then refine it into distillates for resale. Common distillates are gasoline, diesel fuel, jet fuel, kerosene, and heating oil. Gasoline, diesel, and jet fuel are the three largest derivatives of crude oil. You know where this is going, right? With virtually the entire country on lockdown, demand for gasoline and jet fuel have significantly diminished. In fact, gasoline sales in the second week of April were -47.9% lower than a month earlier. Lower demand for gasoline has caused prices at the pump to plunge by -30% year to date, with spot gasoline prices tumbling by -67% in the same period. In case you have a private jet or maybe you were just wondering, jet fuel prices have fallen by -68% year to date. Lower prices of distillates mean that oil refiners are not making enough profit in some cases to justify refining. If oil refiners stop buying crude oil to refine, supplies build up and need to be stored. As you might guess, storage facilities are nearly at capacity. Futures contracts allow buyers and sellers to fix future prices for a commodity. If you buy a July futures contract for crude oil, you can lock in the current price and take delivery in June. This allows buyers to lock in today’s price if they expect prices to rise between now and when the contract expires. Yesterday, the shortest contract for WTI futures was May, and that contract stops trading today. That means if you are holding a single May WTI contract at tonight’s close, you will be taking delivery of 1,000 barrels of crude oil on May 1st. Have no place to store that crude oil? You better sell the contract. With low demand and diminishing storage capacity, contract holders are not eager to take delivery, which is one of the primary reasons for yesterday’s future price falling below zero. Negative prices aside, one can observe the future prices for different delivery dates to get an understanding of what oil traders believe is the path of demand. The June WTI contract closed yesterday at $20.43, which means that traders believe demand will be stronger in a month (WHILE YOU SLEPT, the June contract fell to around $16 but hit a low of $11.78). If you look out to September where many believe things in the economy will get back to near-normal, futures for that month closed at $29.84 / barrel yesterday. So you see, when it comes to commodities such as crude oil, supply and demand is more than just an obscure economic concept. There are bushels, barrels, troy ounces, etc. that need to be transported, processed, and stored. Too much supply and low demand mean lower prices, which are generally good for consumers but not so much for producers and processors.
THE MARKETS
Stocks fell yesterday as investors braced for a volatile week of earnings releases and strong selloff in crude oil futures. The S&P500 fell by -1.79%, the Dow Jones Industrial Average dropped by -2.44%, the Russell 2000 sold off by -1.28%, and the NASDAQ Composite Index slipped by -1.03%. Bonds advanced and 10-year treasury yields fell by -4 basis points to 0.60%.
NXT UP
- Existing Home Sales (March) are expected to have dropped by -9.0% for the month compared to a +6.5 growth a month earlier.
- Congress is close to coming up with another stimulus package, referred to as Phase 3, which is expected to be worth upwards of $450 billion. Expect some news on that front today and in upcoming sessions.
- This morning Philip Morris and Coca-Cola beat estimates while Snap-on, Comerica, CIT, and Travelers missed. After the bell we will hear from Lockheed Martin, Snap, Chipotle, Texas Instruments, and Netflix.
- Stock futures are pointing to a weak opening, falling overnight on further pressure from energy markets.