Just thought I could share this concerning the fall in oil price.
🧑💻 This is Taylor. Taylor is an independent investor/trader. He makes his money by buying stocks and commodities, and then selling them to somebody for more money.
In December Taylor saw that he could get 1,000 barrels of WTI oil delivered in May 2020 for $35/b from👷♀Sally who works at West Texas Oil Producer.
💵 Taylor thinks those barrels will be worth more money sometime between now and May so he signs a contract agreeing to take them.
💉 Well thanks to Covid-19 and surplus oil those barrels never got above $35. Taylor has a problem because he sits at a computer. He can’t physically physically take 1,000 barrels of oil, and he cannot just tell Sally “never mind” because he signed an agreement to take it, and if he doesn’t the contract most likely says he will have to pay Sally some indefinite storage fee.
📈 Now Taylor needs to cut his losses and sell somebody who can physically take the oil contract he has with Sally. Today is the last day he can do that.
Enter 👩🔧 Janet. Janet owns a big tank farm in Texas. She buys physical oil as cheap as possible and stores it in her tanks, then sells it once it’s worth more. Janet has had a bad couple of months as oils gone down and she hasn’t made any money. She’s just been sitting on oil and maybe buying some that’s extra cheap. Janet doesn’t want anymore oil right now because all her usual customers don’t want oil, and she only has so many tanks.
💰Taylor would like to sell Janet his contract so he offers her $10. She says no. So he offers her $5. Still no. Eventually he says, “Fine I’ll give you 10$ to take my contract”. And that is how the price is negative.