Gas prices are displayed at a Shell gas station on March 10, 2020 in Los Angeles, California
Category:
News

OK, I Think I Understand This Whole Oil Debacle

Image of Vivian Kane
Vivian Kane
|

Published: Apr 20, 2020 05:33 pm

This article is over 4 years old and may contain outdated information

Recommended Videos

For what is apparently the first time ever, the price of oil has sunk below $0 a barrel, leading a lot of people to realize they really don’t understand how our financial markets work.

I totally admit it, I am one of those people. I know “buy low, sell high.” I know the stock market gets used as a stand-in for the economy as a whole way too often. But seeing everyone on Twitter discussing the “May WTI” and “crude futures” was going way over my head and I wasn’t alone in that. To most of us, the idea that oil could have no or negative value is perplexing.

After emerging from a rabbit hole of research I can confidently say that unfortunately, we will not be getting paid to fill up our gas tanks. But this is not normal and it’s not good. (Depending on your point of view, I guess.)

Basically, what this all boils down to is that the financial markets don’t trade in actual things, but in the idea of things. All of this is about crude oil’s May “futures.” Instead of buying physical oil, you’re essentially betting on the price of oil next month. When your May contract ends–which is happening now–you sell that contract (and then buy a new June contract, always keeping things in a future abstract space where hopefully the price keeps going up) or you find a way to take the actual physical oil.

But right now, no one wants that oil. We’re using a whole lot less of it than usual right now and the major U.S. hub in Cushing, Oklahoma is reportedly full up.

Which means people either have to go get their oil and store it … somewhere, or they’re having to take whatever price they can get, which is nothing or even less than nothing.

Bloomberg has a helpful explainer of the situation. (And another on Business Insider.) Here’s a good relevant bit:

There are legendary stories on Wall Street about newbie commodities traders who forgot to roll their positions and had to scramble to find somewhere to store 10,000 pork bellies or bushels of wheat or barrels of oil or whatever. These stories are funny because they are rare, perhaps mythical; mostly financial traders just remember to keep their commodities trades in the world of financial abstraction.

Obviously there are a lot of complexities here and terms that will sound totally weird to non-economy people like “contango” and “mega (or super) contango” but basically here’s the deal:

What this means moving forward is pretty unknown on all fronts but as far as I can tell, that’s the gist for now.

(image: Mario Tama/Getty Images)

Want more stories like this? Become a subscriber and support the site!

—The Mary Sue has a strict comment policy that forbids, but is not limited to, personal insults toward anyone, hate speech, and trolling.—

The Mary Sue is supported by our audience. When you purchase through links on our site, we may earn a small affiliate commission. Learn more about our Affiliate Policy
related content
Author
Image of Vivian Kane
Vivian Kane
Vivian Kane (she/her) is the Senior News Editor at The Mary Sue, where she's been writing about politics and entertainment (and all the ways in which the two overlap) since the dark days of late 2016. Born in San Francisco and radicalized in Los Angeles, she now lives in Kansas City, Missouri, where she gets to put her MFA to use covering the local theatre scene. She is the co-owner of The Pitch, Kansas City’s alt news and culture magazine, alongside her husband, Brock Wilbur, with whom she also shares many cats.
twitter