It speeds it up by showing how hopeless the situation is. A lot of oil companies (the non-majors) have been limping by operating unprofitably taking on more and more and more junk bond level debt and hoping we return to $75+ oil as their only chance of survival. Stuff like what happened today is going to have an effect on the psyche of the oil industry and people willing to invest in it or lend to it for a while.
But ‘risk’ is both the risk of truly going busto, and of an earnings decline that makes the valuation drop. Both are obviously future facing as present returns are not the same as future returns.
Giving a company a valuation of 25x current earnings is absurdly optimistic as there are an absurd array of outcomes that will make that valuation incorrect. Even assuming that they will grow earnings at some rate it’s still absurd.
Right now there are a few major threats to future earnings for most companies:
- wages going up (this is a real risk given the political climate and the payrate of the typical worker in 2020 relative to the cost of living)
- Financing costs going up (with interest rates this low this is also a major risk over the long run)
- supply chain stuff raising costs (this changes by industry and is the most likely to be priced in, although there are many industries with massive risks in this category incoming because of environmental concerns over the next decade or two)
- Major regulatory/tax changes altering what % of earnings actually make to shareholders, and in some cases threatening the very viability of the industry.
There’s a huge assumption baked into any stock trading at 25x current earnings that they will fade almost all of this long term, and I think that’s extremely unrealistic. And these are just a few off the top of my head. There’s always some chance that a true long tail event is going to smite your specific stock… although that’s significantly reduced by diversification ldo.
I think there’s a combination of storage and transportation. I’m just internet sleuthing right now, but the CME NYMEX Rulebook on Light Sweet Crude Oil Futures says the following about physical delivery:
The seller shall provide crude oil which is free from all liens, encumbrances, unpaid taxes, fees
and other charges.Delivery shall be made free-on-board (“F.O.B.”) at any pipeline or storage facility in Cushing,
Oklahoma with pipeline access to Enterprise, Cushing storage or Enbridge, Cushing storage. Delivery
shall be made in accordance with all applicable Federal executive orders and all
applicable Federal, State and local laws and regulations.
So it’s not some ambiguous situation where you can just say, “Hey UPS, deliver my oil barrels to my house, please.” You have to have the logistics to actually accept and store that oil somewhere in Oklahoma or have logistical arrangements to transport it to your actual storage location.
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This might not be right. If it’s based on delivery dynamics, the negative oil price thing may be a financial benefit to producers. Financial speculators having to pay a bunch of money not to take delivery of oil doesn’t hurt oil companies–AIUI (may not be 100% correct), many producers have some ability to take production offline, so they don’t need to deliver on a particular date unless they agreed to. But many of them are short these toxic futures (i.e., they agreed to deliver the oil, but the counterparties don’t want it). They can just close out their short for $20 a barrel if they don’t want to deliver the oil. Net result is a transfer to the oil industry.
Seriously, if I shorted oil at $0 and turned a big profit, I’d feel like a pretty fucking big swinging dick.
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Can somebody eli5 how crude is trading negative. I dont understand it in the slightest
The contract in question is for May oil futures. These aren’t options, which can just be thrown away if the owner decides they no longer want them. Instead, the owner (long side) of the contract at contract expiration (tomorrow) has to take physical delivery of the oil in Cushing, Oklahoma sometime in May. So if I, random speculator living in my parents’ basement, had purchased one of these contracts because I believed oil was underpriced, I would be shitting my pants because I’m now responsible for 1,000 barrels of oil. I’ve got to figure out how to store them or transport them or offload them to someone else. It’s a game of hot potato with one potato (contract) equal to 42,000 gallons of oil. And right now, nobody wants to catch that potato without being paid for it.
A bunch of people buy contracts to take possession of oil at a specific city in Oklahoma in May. Some of those people, speculators, have no ability to actually have tanker trucks of crude parked in their lots, so they must sell. They were unable to find people to take it unless they paid storage places to take it off their hands.
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Thanks guys. That’s actually really interesting. My wife and I were just talking about how crazy it is that we can have such a positive impact on the environment simply by staying home for a month. The data showing this improvement should be leaned on heavily by pro environment groups going forward and really concentrated towards moving companies into WFH, which clearly has a gigantic positive impact.
take a look at oil tanker stocks like FRO, STNG, DHT, people are doing just that
This seem like the type of market opprotunity (of which there will be many) that big brains could exploit. Another would be understanding highly leverage players and being about to exploit that information. Another would be understanding what sort of “standard” relationships are built into common hedging/arbitrage models (bond yield vs CPI, oil vs transport costs, or whatever) and being able to spot trend reversals. I don’t know enough to do any of this stuff, but some people do (often in specific domains).
Let’s buy our own tanker, who’s in? HMS Slowpony?
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Texas banks gonna be FUBAR.
BAIL
OUTS
BAIL
OUTS
BAIL
OUTS
WOOOOOOOOOOO!
I really don’t understand how markets aren’t collapsing right now. It’s like a house of cards in a hurricane and everybody is all, “This is fine.”
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What happens if you have the contract and fail to take delivery?
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I’ve thought a little about this, but I know a lot of money is in things like pension funds and endowments and trusts, lazy 401ks, and such, and the managers of such things are basically legally obligated to be invested. I don’t know how much money is “forced” into the market by such vehicles, may be a little, may be a lot, but if it’s a lot, that may help explain, at least to some extent, the market’s performance.
Anyone know any solid source that discusses this?
If it’s like a typical contract, you would basically have to pay the seller the cost of temporary storage until you took delivery. If you were worried about the implications, you would probably arrange for you own storage at the best price you can get. Anyone know any oil storage places not subject to the broader oil market?