A barrel of crude oil currently costs -$37.63 on the West Texas Intermediate futures market. This means that, quite literally, you can get paid to take oil, which is a pretty shocking thing to be writing for someone who grew up paying $4 a gallon for gas, watched America go to war in the Middle East in part to secure oil, and has generally been taught that “the price of oil” is why everything costs so damn much.
We should all have a backup plan in these uncertain times, and so now seems like it could be a good time to get paid to take oil, a commodity that has historically traded for more than $0 and has at times broken $100 per barrel. As someone who knows basically nothing about commodities trading but loves a good get rich quick scheme, I decided to call up commodity traders, academics, and people who study the oil market to learn a) what the hell is going on and b) whether I can get rich from the chaos. Here is what I learned:
Why is oil so cheap right now?
There are two types of commodities markets: The “spot” market and the “futures” market. The spot market is where you’d go if you wanted to buy a barrel (or lots of barrels) of oil right now. It is pegged to a physical good being bought, sold, and traded in real time. There are various futures markets, all of which trade “contracts,” which are essentially pieces of paper that can be exchanged for some amount of grains, or hogs, or metals, or, in this case, crude oil. One oil contract on West Texas Intermediate (WTI), the most important futures market (and the one that went negative), is worth 1,000 barrels (42,000 gallons) of oil. All of these contracts are associated with real, physical barrels of oil. These futures contracts “execute” on a certain date, which is when the oil companies look at your piece of paper for 1,000 barrels of oil and become contractually obligated to deliver you 1,000 physical barrels of oil.
Most traders do not actually ever get oil. Instead, what they do is buy contracts of oil that are set to execute during a specific month, and when that month comes around, they kick the can down the road by selling the contract and buying one for a later month. In theory they do this to make a profit. Besides generally allowing speculators to make money, the futures market is important to the economy because it lets companies who use oil lock in the price they're going to pay for it far in advance, which gives some level of stability to their businesses.
“As much as we talk about commodities as a number or an imaginary contract, there’s a physical aspect to it,” Doug Stetzer, vice president of EKT Interactive, a company that trains people going into the oil industry about how it works, told Motherboard. “If you own a contract of crude oil, when it executes, technically, you have to take delivery of the physical crude oil.”
One commodities trader, who spoke anonymously because he was not authorized to talk to the press, said that having a contract execute is generally considered to be very, very bad. Traders are “taught on day one to never let these futures go to settlement. Because then you’re stuck with 1,000 barrels of oil and you have to find someone to take it for you.” When the economy isn't collapsing, these contracts ultimately end up with an airline or a refinery or an energy company or companies like that.
Normally, selling a contract isn’t a problem because America uses a shitload of oil, which means there are usually lots of oil buyers. But with everyone driving and flying less because of the coronavirus pandemic, demand for gasoline, petroleum products, and other refined oil products has plummeted. So big physical oil buyers such as airlines, refineries, and a host of other industries aren’t buying as much oil as they used to. But production has not slowed down. Russia and Saudi Arabia have flooded the oil market in recent weeks, and America and Canada continue to produce oil from our various onshore and offshore wells.
There are a few problems that have caused the price to plummet:
- No one wants to buy oil
- There is nowhere to put the oil
- May’s futures contracts are set to execute at 2:30 p.m. Eastern time today
What this means is that a bunch of oil speculators who have no infrastructure or capacity to handle tens or hundreds of thousands of gallons of oil have a few hours to figure out what they’re going to do with the oil contracts that they bought a long time ago. It’s kinda, sorta like putting in a fake bid for a rare gem at auction and getting stuck with it, except in this case the thing you’re getting stuck with is hundreds of thousands of gallons of a poisonous pollutant. And so you have a bunch of people panic-selling oil for whatever they can get, which in this case means they are paying people to take oil so they don’t have to take it themselves.
What's happening right now is an anomaly, combining a usually routine monthly contract-execution deadline, a messy commodities market, geopolitics, and coronavirus, but also something like a cartoonish version of the market working as it usually does.
“Weird things always happen when the contracts expire,” Stetzer said. “But this is an extreme scenario.”
Just for reference, the types of companies that normally have the ability to take and store oil are companies such as Morgan Stanley, Glencore, Vitol, as well as some oil refinery companies. These companies are out of storage (or are running out of storage), and so they're not really buying much, either. But normally, having physical storage capacity gives these megacorporations some control over weird times like this: They can buy up tons of oil for cheap, store it, and then sell it later when prices are higher. “Having physical assets allows them to make trades other people can’t make,” Stetzer said.
Seemingly, this mess would offer both opportunity and a chance for deep introspection about what, exactly, we’re doing here. Both Stetzer and Alex Gilbert, who studies energy at The Payne Institute for Public Policy at the Colorado School of Mines, agreed we are in a bizarre and unprecedented situation.
Can I buy the oil?
WTI is traded on the New York Mercantile Exchange In what is some outrageous gatekeeping, you must have a membership to trade directly on this market. According to CMEGroup, which owns the exchange, you must be “an adult possessing good moral character, a good reputation, business integrity, and adequate financial resources to assume the responsibilities and privileges of membership.” You also have to pay a fee, which costs roughly $100,000. This is obnoxious, but you can also pay a commodities trader to trade for you, which means that you can buy oil for this ridiculously low price, if you want to.
“The simple answer is you can buy a crude contract for a couple of bucks [or even receive money to buy one]. 42,000 gallons,” Stetzer said. “If you held onto it til after the market closes, you’d get a call from the exchange saying ‘come get your oil.’”
Alternatively, you can buy physical oil from a small oil manufacturer, but you’ll have to pay whatever price they tell you to, because they wouldn’t be selling it on a market. Planet Money did just that a few years ago.
Where do I get my 1,000 barrels of oil?
Executed WTI contracts are delivered to Cushing, Oklahoma, which is the United States’ largest inland oil distribution center. It is connected to many, many pipelines. Oil that is purchased there is pumped to the Gulf Coast, where it is refined, You can also pick it up in Cushing with a tanker truck.
Where do I put the oil?
This is basically the biggest reason why oil prices are so low right now. It’s not so much that oil is worthless, it’s just that there is too much oil right now, and there’s nowhere to put it. And so investors who are now stuck with a ton of oil they can’t do anything with now essentially have to pay people to store it. And there are increasingly fewer places to store the oil. Cushing, apparently, is out of places to put the oil.
“This raises a serious question of whether there’s enough oil storage in the country,” Gilbert said.
Unfortunately, you cannot just put it in a swimming pool. There are a lot of regulations about where you can store oil, but for the sake of argument, Stetzer estimates that 1,000 barrels of oil would fill up roughly three backyard swimming pools. You would need seven of these above-ground pools to store your oil.
Unused oil isn’t going to be burned or destroyed like unused food is being destroyed. (“The optics of seeing a ton of oil taken and burnt off would be really bad for the industry,” Gilbert said.) Instead, it will probably sit on shipping tanks and in pipelines in our oceans and underground, which could cause a whole lot of other problems.
Gilbert said that there is the very real possibility that pipelines will become "full" and overloaded with too much oil, which can cause a buildup of pressure and could cause environmental problems under a worst-case scenario or if there is not good coordination among producers. He did not say the pipelines could explode, but it very much sounded like he was alluding to the possibility that the pipelines could explode.
Why don’t we simply … make less oil?
A smart thing to do, for the Earth, and seemingly for the industry, which is now selling their product for fewer than zero dollars, would be to simply make less oil. Ultimately this seems to be where we’re heading. Stetzer said, “It’s got to be turned off at the tap. People have to cut supply.” Gilbert said the only way to prevent pipelines from getting overflowed is to take the oil out of the pipelines by using it or to “stop the oil from flowing.”
One issue is that many oil wells simply cannot be stopped easily. “Demand is completely collapsing but you can’t turn off oil very easily. It has pressure, and so you essentially uncap the cork and it just flows out,” Gilbert said. “To re-cap it, you have to damage the well, which means you’re losing a lot of money.”
And so oil wells all over the world are essentially playing chicken hoping demand comes back or their competitors cut supply first—they would rather sell their oil at a loss for a short period of time than stop pumping the oil, because stopping their wells could end up costing more than taking the short term loss.
What’s going to happen?
Nobody has any idea what is going to happen, but both Stetzer and Gilbert think that we will indeed make less oil. The Texas Railroad Commission, which regulates oil and gas production, is set to meet soon and is seemingly very seriously considering restricting oil production, which hasn’t happened in a half century.
It’s also possible that the federal government will use this opportunity to replenish its Strategic Petroleum Reserve, which it uses to keep prices down when supply is low. Stetzer speculated that the U.S. government has the last bit of free oil storage capacity in America.
It is also very bad (for capitalism) that oil is trading for negative money. Traders and economists often look at the price of oil as a sign of stability, and oil prices also affect the prices of other commodities, travel, shipping, etc. While it's evil to go to war for oil, it's not stupid—oil is still, in many ways, the backbone of our economy and it's certainly the backbone of our transportation and shipping infrastructure. As much as we'd all like to say this is the end of oil, it is not.
"Unless things return to normal, we’re going to have very large price impacts and bankruptcies, mergers and acquisitions, and instability," Gilbert said. "For me when I look at oil prices, I see an indicator of what’s happening in the global economy."
Is this all fantastically stupid?
Can I get oil and bring it to my house?
If you're willing to drive to Oklahoma and obtain physical oil, let's talk.