What it means when oil has negative value and why prices go up for no reason

By 04/22/2020April 26th, 2020economy

I was wondering what they meant when they said oil was in negative value.  What they are talking about is oil futures trading.  It is the oil futures contracts that have gone negative.  In’08, futures trading was the reason that gas went above $5 a gallon at the worst possible time and for no apparent reason.

Futures are contracts to purchase a product in the future at a price set today, or when the futures contract is bought.  Before de-regulation, it was illegal to buy futures contracts unless you were in an industry that uses the commodity specified in the futures contract.  An example would be airlines that sell tickets a year in advance.  They would buy jet fuel futures to lock in their fuel cost so they wouldn’t be bankrupted by an increase in fuel prices since they had already locked in their ticket price.
Futures were not supposed to be a casino.  One reason why was made evident in ’08 when gas prices went above $5/gallon for no reason other than speculators running up the price of oil futures.  It happened at the worst possible time, when credit costs increased, causing people’s mortgage payments to soar, then the gas they needed to get to work tripled as well.  Rich financial speculators wanted to get out of mortgage backed securities and into a sure thing.  Too many of them figured everyone needs gas, so they bid up oil futures, and everyone suffered excessive gas prices because of them.  This is exactly the reason that speculating on futures was forbidden, and why de-regulation hurt us all.
Today, demand for gas is way down.  Refineries have shut down.  Oil storage facilities are full.  There is no place to put new oil being delivered.  So people who thought they were going to make a killing in oil futures have contracts that say they agree to take delivery.  Normally they would sell off their futures contract to a refinery or someplace which can store the oil and extract a profit out of the supply chain that delivers the gas we put in our cars or the power-plant.  With no one to buy the oil, Mr. Big Time is still contractually obligated to accept delivery.  He cannot refuse delivery because of the futures contract.  So he has to find someone to take all that oil off his hands.
Its not like he can just stuff ten thousand barrels of it in a closet and sell it when the market recovers.  If all the storage is full and refineries are not taking any more, he has to sell the futures contract to someone.  Its the proverbial hot potato.  Since no one wants it, no one has any place to store it.  Today Mr. Big Time actually has to pay someone to take it off his hands, or drain his swimming pool so he can fill it with oil in order to accept the delivery he is contractually obligated to accept.  (actually zoning and code enforcement would fine him if he filled the pool with it, so he’s screwed)  Foisted by his own petard.  Shot himself in the foot.  bankrupted by his own greed.
In My opinion (and this is just my opinion) futures should never have been de-regulated.  Mr Big Time should never have been allowed to speculate in commodities we need, running up prices and extracting his profit from our supply chain.
So what do you think?  Was it a good idea to de-regulate the futures market so that speculators could extract their profit from supply chains of products we can’t live without?  Is it just capitalism at its best?  An opportunity for a shrewd investor?  Or do you think de-regulating this critical market was a mistake?  Should we be demanding that futures markets be re-regulated to protect consumers and keep prices at levels determined by normal market forces instead of suffering ’08 levels of price jumps based on market speculators?  We are very concerned about America’s vulnerability to un-natural price jumps caused by unregulated futures speculation.  Now that you know why these random price increases happen, are you concerned as well?  We thought you would want to know.

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