Market Commentary #51

Published as part of Issue #51 of the Bitcoin Pulse on 4/21/2020. Join for full commentary on technical and fundamental analysis.

The Oil Price Collapse

You just lived through history again. Of course, so many events over the last few months have been historic but the oil rout yesterday is one of the biggest.

Yesterday, was the last day to trade the May futures contract for West Texas Intermediate oil (WTI). These contracts settle in Cushing Oklahoma. Why is a small town in Oklahoma considered the “Pipeline Crossroads of the World”? It began in 1912 with an oil boom, then over the decades they built out their storage and pipline facilities to a massive scale, able to move 1.5 million bbl a day. Then in 1983, COMEX made it their settlement location.

What happened yesterday was a quirk of the futures market. If you hold the contract to expiration, you must physically take delivery of 1000 bbl of oil. Under normal conditions there’s plenty of storage space in Cushing to take that delivery for contract holders, charging a storage fee of course. However, due to the current economic situation, oil storage at Cushing is near full (I’ve seen reports of 77% full to completely full). The point is, there wasn’t enough storage for people to take delivery. That doesn’t, however, relieve the buyers of the oil from taking delivery. They had the impossible task to find another place to store it or sell their contracts at any price.

Professional oil traders weren’t surprised, most of them rolled over last week. Typically, contracts aren’t held to expiration, they are rolled over to the next month for a fee, and right now, that fee is very expensive. Inexperienced retail traders were caught. They couldn’t take delivery and couldn’t afford to roll it over. They were squeezed and forced to sell at any price. Why were their 100,000 contracts held by retail? Maybe they had a false sense of security from Trump committing to buy oil at $20/bbl and/or maybe it was irresponsible underestimates of the economic crisis. Either way, the pain was felt disproportionately by the little guy. They should have bought bitcoin!

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