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james22

By james22
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rb Newbie

rb

Posted
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Well I guess the futures mkt is not that “efficient” after all...now the June contract also tumbles as people realize the same could happen a mo from now...

Have a look at the spot market. Holy shit! It looks like an oilman's rendition of the shining.

Plains_Spot.thumb.jpg.fa6956ff9bb0a987e527474aeef5d0c9.jpg

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Spekulatius
Spekulatius

I guess it may be time for another flush: I do not think the Saudi's will play this over again like in 2015, as it cost them dearly.

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petec Experienced

petec

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This is not just a storage problem.

Somebody was getting material margin calls, and tried to roll a big long position into other months; ordinarily not a problem, as long as you have the confidence of the market. But if a growing liquidity concern is suspected, no-one wants you as the counter-party, and you can no longer roll. All you can do is fire sale your position for as much you can get, by end of day.

 

The negative price - indicates that somebody was willing to pay others [a lot] to take the contacts off their hands. This would only occur this aggressively, if liquidity had been cut off, and there was a 'containment' instruction to avoid any physical oil. Physical oil in transit, is routinely sped up, or slowed down, according to need. We will know, if there is a liquidity injection into the inter-bank clearing system within the next few days.

 

There's lots of storage. Just keep the oil in the ground, and DON'T produce it.

We just don't have a mechanism yet - most would think that before the next expiry we very likely will have.

 

We live in interesting times.

 

SD

 

This may be a really dumb question but if someone out there has a liquidity problem, how can they pay someone else to take the contract off them? I can understand how a liquidity crunch would drive a firesale at a low positive price. I can't understand how it would drive a negative price. Surely if you're f***ed for cash and the price goes negative you just go bust and stop worrying about the fact that you can't accept delivery?

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alwaysdrawing Newbie

alwaysdrawing

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USO halted!

Are there any other etfs that is doing what USO is doing? I started to put a order on USO 30 seconds before the close yesterday but I didn't get it in before close.

 

Do you want to buy or short?

 

USO is going to get crushed by the contango.  It is not a good ETF to speculate on the price of oil.

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alwaysdrawing Newbie

alwaysdrawing

Posted
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This is not just a storage problem.

Somebody was getting material margin calls, and tried to roll a big long position into other months; ordinarily not a problem, as long as you have the confidence of the market. But if a growing liquidity concern is suspected, no-one wants you as the counter-party, and you can no longer roll. All you can do is fire sale your position for as much you can get, by end of day.

 

The negative price - indicates that somebody was willing to pay others [a lot] to take the contacts off their hands. This would only occur this aggressively, if liquidity had been cut off, and there was a 'containment' instruction to avoid any physical oil. Physical oil in transit, is routinely sped up, or slowed down, according to need. We will know, if there is a liquidity injection into the inter-bank clearing system within the next few days.

 

There's lots of storage. Just keep the oil in the ground, and DON'T produce it.

We just don't have a mechanism yet - most would think that before the next expiry we very likely will have.

 

We live in interesting times.

 

SD

 

This may be a really dumb question but if someone out there has a liquidity problem, how can they pay someone else to take the contract off them? I can understand how a liquidity crunch would drive a firesale at a low positive price. I can't understand how it would drive a negative price. Surely if you're f***ed for cash and the price goes negative you just go bust and stop worrying about the fact that you can't accept delivery?

 

This is a real market for physical delivery, so if you own the contract you MUST take delivery or you are bankrupt, and your broker will have to handle it for you.

 

Oil is not like steel or copper or something else you can just take delivery of and drop off at a yard somewhere.  You can't dump it out on land or the ocean, you need to pay someone for storage, and that's what drives the negative prices, as those storage costs are non-trivial, and during a shortage like the present, there is simply nowhere to put the oil that must be delivered.

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petec Experienced

petec

Posted
Posted

 

This is not just a storage problem.

Somebody was getting material margin calls, and tried to roll a big long position into other months; ordinarily not a problem, as long as you have the confidence of the market. But if a growing liquidity concern is suspected, no-one wants you as the counter-party, and you can no longer roll. All you can do is fire sale your position for as much you can get, by end of day.

 

The negative price - indicates that somebody was willing to pay others [a lot] to take the contacts off their hands. This would only occur this aggressively, if liquidity had been cut off, and there was a 'containment' instruction to avoid any physical oil. Physical oil in transit, is routinely sped up, or slowed down, according to need. We will know, if there is a liquidity injection into the inter-bank clearing system within the next few days.

 

There's lots of storage. Just keep the oil in the ground, and DON'T produce it.

We just don't have a mechanism yet - most would think that before the next expiry we very likely will have.

 

We live in interesting times.

 

SD

 

This may be a really dumb question but if someone out there has a liquidity problem, how can they pay someone else to take the contract off them? I can understand how a liquidity crunch would drive a firesale at a low positive price. I can't understand how it would drive a negative price. Surely if you're f***ed for cash and the price goes negative you just go bust and stop worrying about the fact that you can't accept delivery?

 

This is a real market for physical delivery, so if you own the contract you MUST take delivery or you are bankrupt, and your broker will have to handle it for you.

 

Oil is not like steel or copper or something else you can just take delivery of and drop off at a yard somewhere.  You can't dump it out on land or the ocean, you need to pay someone for storage, and that's what drives the negative prices, as those storage costs are non-trivial, and during a shortage like the present, there is simply nowhere to put the oil that must be delivered.

 

I know. But that doesn’t explain how (in SD’s scenario) a player that has no cash (liquidity crisis) can *pay* someone to take the contract. That’s what I’m asking.

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rb Newbie

rb

Posted
Posted

 

This is not just a storage problem.

Somebody was getting material margin calls, and tried to roll a big long position into other months; ordinarily not a problem, as long as you have the confidence of the market. But if a growing liquidity concern is suspected, no-one wants you as the counter-party, and you can no longer roll. All you can do is fire sale your position for as much you can get, by end of day.

 

The negative price - indicates that somebody was willing to pay others [a lot] to take the contacts off their hands. This would only occur this aggressively, if liquidity had been cut off, and there was a 'containment' instruction to avoid any physical oil. Physical oil in transit, is routinely sped up, or slowed down, according to need. We will know, if there is a liquidity injection into the inter-bank clearing system within the next few days.

 

There's lots of storage. Just keep the oil in the ground, and DON'T produce it.

We just don't have a mechanism yet - most would think that before the next expiry we very likely will have.

 

We live in interesting times.

 

SD

 

This may be a really dumb question but if someone out there has a liquidity problem, how can they pay someone else to take the contract off them? I can understand how a liquidity crunch would drive a firesale at a low positive price. I can't understand how it would drive a negative price. Surely if you're f***ed for cash and the price goes negative you just go bust and stop worrying about the fact that you can't accept delivery?

 

This is a real market for physical delivery, so if you own the contract you MUST take delivery or you are bankrupt, and your broker will have to handle it for you.

 

Oil is not like steel or copper or something else you can just take delivery of and drop off at a yard somewhere.  You can't dump it out on land or the ocean, you need to pay someone for storage, and that's what drives the negative prices, as those storage costs are non-trivial, and during a shortage like the present, there is simply nowhere to put the oil that must be delivered.

 

I know. But that doesn’t explain how (in SD’s scenario) a player that has no cash (liquidity crisis) can *pay* someone to take the contract. That’s what I’m asking.

I think he's talking about market liquidity i.e. there are no buyers but the idiot long still has money.

 

There could also be some of this:

Dumb investor here, Can I buy oil futures using a discount broker ? what happens if I don't sell it ? will I get a barrel with my name on it in Cushing Oklahoma I can take home ? Why wouldn't everyone do it and store the oil in their back yard and flip it for 20$ next month for a 40x return in a month ?

This poster is not as dumb he thinks. He was smart enough to ask the question. I'm sure there were other dumber guys that didn't, their broker seized their contracts and dumped them.

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wescobrk Collaborator

wescobrk

Posted
Posted

Robinhood shows USO, an ETF that holds oil futures contracts, was the biggest add today.  Retail investors don't know WTF they are buying, and are going to crash into contango.  I wouldn't be surprised if USO collapses in the next 30 days.  I see absolutely no reason why the June futures won't collapse like May causing massive losses for USO holders.

 

I bought a very small position in USO July $2 puts.  It's actually a similar situation to XIV during volmageddon, and would be 8-10 bags if the ETF liquidates at 0.  I don't think it would get to 0, but as seen today the market could get pretty crazy as people realize there is absolutely no storage for physical oil.

Article in FT today saying USO is taking (I believe) 20% of its fund and buying longer out futures contracts.

Does that change your conviction always drawing?

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alwaysdrawing Newbie

alwaysdrawing

Posted
Posted

Robinhood shows USO, an ETF that holds oil futures contracts, was the biggest add today.  Retail investors don't know WTF they are buying, and are going to crash into contango.  I wouldn't be surprised if USO collapses in the next 30 days.  I see absolutely no reason why the June futures won't collapse like May causing massive losses for USO holders.

 

I bought a very small position in USO July $2 puts.  It's actually a similar situation to XIV during volmageddon, and would be 8-10 bags if the ETF liquidates at 0.  I don't think it would get to 0, but as seen today the market could get pretty crazy as people realize there is absolutely no storage for physical oil.

Article in FT today saying USO is taking (I believe) 20% of its fund and buying longer out futures contracts.

Does that change your conviction always drawing?

 

That was true as of a couple weeks ago, but the fund will continue to waste in contango.  It is unlikely to go to 0 because of the 20% in the second month, but it will lose a lot of value if spot drops big before the roll.  I think the pros will front run USO this go around, as USO has become a large % of the futures market.

 

The halt this morning was because they are suspending share creation, which makes sense as people pour money into the ETF they are indiscriminately buying a huge percentage of the futures market.

 

I don't have a large position, but I bought 75 July $2 USO puts for between 0.20 and 0.28 yesterday, and the current price is 0.50.  It's such a small position I'm inclined to let it ride, as I think the oil market is still profoundly oversupplied, and contango will persist.  I think the "safe" way to play that thesis is the tanker trade, which I have a much more significant position in.

 

 

 

 

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vikx01 Newbie

vikx01

Posted
Posted

Just curious as to what explains the contango steepening even for brent. There is storage capacity shortage for brent too but this sharp a change this sudden. Am I missing something?

I have no position in the tankers. Just curious.

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alwaysdrawing Newbie

alwaysdrawing

Posted
Posted

June continues to fall, I am buying more USO puts.  I think this could implode today if June goes down to the margin req.

 

I calculate NAV of USO to be 2.42, which means the premium to NAV is around 19%

 

I think it's likely we could see liquidation this week.  Buying some shorter term OOTM options.

 

Futures traders may press.  Watch for June to continue to fall

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