On April 20, prices for a barrel of US oil dropped so low that traders would actually pay you to take the asset off their hands. At its lowest point, it was priced at -$37.63. The problem that caused such a sharp drop in prices in this instance was storage capacity. As the BBC helpfully explained, “Oil is traded on its future price and May futures contracts are due to expire on Tuesday [April 21]. Traders were keen to offload those holdings to avoid having to take delivery of the oil and incur storage costs.”
The financialization of the economy is predicated on real-world assets that are used for real-world things, like oil for providing energy, being traded on financial markets for speculative investors to make a profit. Usually, this passing around happens on a computer, with the owner of however many barrels of oil never having to deal with them as physical entities. This dramatic oil price drop happened because traders realized that the collapse in demand meant they may actually have to receive and store the asset. I suspect that trading companies like Barclays and Citigroup don’t have abundant oil barrel storage space in the basement of their headquarters.
Read Full Article »