Stock of the Day
Out of context: Reply #164
- Started
- Last post
- 631 Responses
- drgs0
^
Technically it is only the futures oil markets that are negative. No one will sell you actual oil at a negative price.A futures contract is basically a contract between oil companies and oil refineries, where oil companies are selling their future oil (one month from now) and oil refineries are buying the right to buy this oil at a specific price, which is decided today.
So, if I run an oil refinery, and I buy a futures contract to buy oil at $20 one month from now, but the price goes down to $10, then obviously this was a mistake. But if the price goes up to $30 I've made a good deal. In any case, a futures contract gives certainty, or at least this is the idea.
There are two problems:
1) Most futures contracts are bought and sold by speculators, who don't know what to do with crude oil or where to store it.
2) A futures contract is >>an obligation<< to buy oil at a specific price, and it has an expiration date, ie. if you don't get rid of the contract before 21. April, you need to pay up and you will have oil barrels delivered to your home address.Coincidentally, today was the expiration day of April crude oil futures. Demand has collapsed since March and all speculators are desperately trying to get rid of their futures contracts which they bought one month ago, and even paying money to anyone willing to collect all that oil.
Tomorrow the situation will be completely different.