Oil is Down Again: And a Bailout Won't Even Help

Mish

Oil fell nearly 25% on Monday and is poised for another decline on Tuesday.

Speculators keep betting on an oil industry bailout or a revival in demand. Neither is in sight.

CL 0 2020-04-28

Crude is down again after hours following a 25% plunge on Monday. 

The large speculators are long 587,180 contracts and have been increasing their bet since April as the arrow show.

They appear to be betting on one of two things.

  1. A Bailout
  2. A Return in Demand

Bailout: OK, suppose Trump and Congress work out a deal to hold reserves in the ground. There is still excess supply with no where to put the oil. At best, this maneuver stabilizes the price at some price below the price to produce the oil.

Demand: As people go back to work demand will pick up. But demand return will be slow, not instantaneous. 

On the corporate side, expect more work-at-home, more teleconferencing, and fewer flights.

On the personal side, consumers need to rebuild savings. Many will be scarred for life. 

Gains or Losses

Gains or Losses on $10 Move in Crude 2020-04-27

The large speculators increased their bet from 435,108 contracts on April 1 to 587,180 contracts as of last Tuesday, April 21.

There will be a time for a long energy play, but this does not seem like the time.

Note that 40% of Oil Producers Will Go Bankrupt if $30 Persists

Paper Oil

Oil is another example of leveraged trades. Even more so than gold, speculators will not take delivery.

For discussion of delivery issues related to gold, please see Gold "What If?" Silliness

It's time for personal responsibility, not bailouts of favored industries.
That's the only plan we need.

Fed Bailout Not Possible

Some readers suggested the Fed would bail out the sector. It cannot. There is no place to store the oil if the Fed bought futures and I do not believe the Fed would even if it could.

Those expecting hyperinflation out of forced debt writeoffs and plunging prices understand neither hyperinflation nor inflation.

Moreover, hyperinflationists and strong inflation proponents do not even understand what is most important in general: credit and the balance sheets of lenders.

For discussion, please see Hyperinflationists Come Out of the Woodwork Again.

Mish

Comments (26)
No. 1-11
Sechel
Sechel

Just ran HS on Cl! (generic CL1 vs OIL ETF started falling apart back in January. Interesting graph

interesting things going on with the oil etf "OIL". The fund has been getting out of all its short term June contracts. Saw the story yesterday on Bloomberg. ETF's are safe right? only down like 86% for the year. Surprised Zerohedge doesn't have a conspiracy piece on this. Maybe they do. I didn't check

I wonder if one constructed type of implied forward curves from oil futures trading like is done with interest rate swaps what the market implied July price would be in a month?

JonSellers
JonSellers

"It's time for personal responsibility, not bailouts of favored industries.
That's the only plan we need."

Yes, but that option went away forever with the Supreme Court's Citizens United decision.

tokidoki
tokidoki

Mish needs to explain this "credit and the balance sheets of lenders." and the oversubscription of Netflix's junk bond offering + yesterday's Carnival's offering.

Seems like everyone's fine. Who is going to stop the Fed? Until that question is answered, nothing else matters and Mish is wrong.

MiTurn
MiTurn

LPG is falling too. Same dynamic, I suppose.

Bam_Man
Bam_Man

Yet, Chevron stock (CVX) is up 74% since 3/15 when crude oil was $32/bbl.
Crazy....

Tony Bennett
Tony Bennett

"A Bailout
A Return in Demand"

...

I would add Supply.

OPEC+ constituency is a den of thieves. Look for members to increase production (no matter if quota agreed upon) to get $$s necessary to keep civil unrest at bay in their respective countries. I just don't see spigot tightening.

NewUlm
NewUlm

Every unit of energy = a unit of GDP. While the climate change folks cheer, our standard of living is dropping like a rock. We can't print our way out of less production.

Tanner D
Tanner D

Naive question. Are big oil companies too big to save?

TimeToTest
TimeToTest

Don’t hear much talk about Saudi Arabia’s impending bankruptcy. That should tighten supply as civil unrest takes hold and the Saudi royals start to slaughter people in the streets.

Greff
Greff

Why is China not building additional Mega-storage for its strategic oil reserve? Because it does not have a serious reserve currency yet! This USO ETF story is not new, it is repeating what LNG did a decade ago...stay tuned for the next tranche of eroding value betting contango speculators.


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