What is this trade? What makes it go? “- frequently asked questions you can get from your” non-financial “friends and relatives.
If you’re smart and want to keep things simple, your answer might be something like: “Supply and demand. It’s all about supply and demand; everything from toothpaste to your home, currency or whatever for that matter. If people want it, the price goes up. If they don’t want it, the price goes down. “
“OK. I see!” They might answer, while the smarter ones might dig deeper and ask: “So, when the Central Bank lowers interest rates, why does the value of the currency fall?”
You answer, “Again; Supply and demand. When interest rates go down … less desirable … the cost goes down. Supply and demand.”
Of course, this is a quick answer, and depending on the audience, you can go a lot deeper and make it much more fun (or more boring, depending on your victim). However, in answering this question, I can absolutely positively guarantee that you will never say, “The dollar is falling because there is nowhere to put it! We’re just bursting at the seams with all the dollars! “
It just doesn’t happen.
However, looking at the Crude, with the current state of our global “closed” economy, nobody flies, drives, water-skis, or manufactures much. Therefore, the demand is so low and the market is in such a state that the leading financial news networks have found it necessary to introduce us to a small town in the United States called Cushing.
Cushing, Oklahoma is where all WTI goes, waiting for someone to export it or ship it to a refinery, and until recently the city’s importance was diminishing. It’s like being in that expensive club that you can’t get into, and no credit cards or bribing a doorman will give you a seat at the table.
Not bad for a city of 7,800, storage for 76 million barrels of oil, Pizza Hut and a huge Wal-Mart. In fact, industry experts are predicting that within a few weeks, shipments will exceed the storage capacity at Cushing.
Thus, our philosophy of “supply and demand” adopts a completely new paradigm: “Supply, demand and where-what-I-put?”
In fact, “supply / demand / where the hell?” ratios became so distorted that the May WTI contract turned seriously negative, with producers waving a white flag saying, “Help! I don’t want that, and I’ll pay you to take it.
Brent Crude has a completely different set of storage problems, as the cost of supertankers is increasing every week, and of course they have nowhere to go. Ironically, it seems that the biggest consumers of oil right now are the supertankers, which roam the oceans wondering who will need all that Brent oil.
This is not the first time this has happened, and as a matter of fact, we recently watched this film. In the past year, the price of natural gas (often a by-product of oil drilling) has declined several times for the same reasons.
So, a couple of weeks ago, just after the WTI fell below $ 40 a barrel, I shot a video explaining the difference between the spot price of US oil and various types of futures contracts. Inevitably, the question arose from a retail trader: “Should we buy crude oil?”
The simple answer is yes. “However, very often simple answers create complex questions. In this case, after” Yes “should be” When? “
Many analysts believe that we are not yet out of the woods. We see most economies talking about lifting social distancing restrictions, which means we can drive cars to a gas station, but are unlikely to go to the airport anytime soon. Production may start, but it will likely come back to life as companies will have to return labor slowly and safely and possibly with limited production.
The fact is that it will take months to clear the accumulated crude oil reserves, and we will still have the threat of a negative oil price in a couple of weeks, when the June contract expires. That being said, S&P Global – the largest commodity index – moved June contracts to July to protect investors, but it’s like climbing a tree to escape a wolf. Eventually, you will have to get off the tree.
Now, if life and trade weren’t interesting enough, we would have to combine supply / demand / where the hell? relationship with our old friend – “Trade War”. (Remember last year when every tweet or press conference on the US / China sidetracked your open positions?) Well, news from the Orange Office indicates that US-China relations could be in jeopardy again, even before we get out of this COVID-19 story. So, if you missed the market swings from Tariffs-R-Us last year, the sequel to this movie is about to hit theaters, just when you didn’t want to buy popcorn.
Actually, there is a movie theater in Cushing, Oklahoma. Unfortunately, it looks like it will be closed for a while.
This guest post is courtesy of Brad Alexander, founder of FXLarge, a leading content creation company for brokers and investment firms. In this post, Brad shared his thoughts on the recent crude oil disaster and the principles of supply and demand.