Why Negative Prices Exist and What They Can Teach Us
Money For the Rest of Us
J. David Stein
4.5 • 1.4K Ratings
🗓️ 29 April 2020
⏱️ 28 minutes
🧾️ Download transcript
Summary
Why the oil price fell below zero and what are other examples of negative prices. What lessons can we learn from negative prices.
Topics covered include:
- How oil futures work and why the oil future prices fell below zero for the first time ever.
- Why has the United States Oil ETF (USO) lost so much money.
- How ETF authorized participants create new shares only so they can be shorted.
- How storage problems for oil and electricity can lead to negative prices.
- How negative interest rates are another form of negative prices.
- Why sellers will pay buyers to deliver a service to them.
- What financial lessons can we learn from negative prices.
Thanks to LinkedIn Learning and The Investor's Podcast for sponsoring the episode.
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Transcript
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| 0:00.0 | Welcome to Money for the rest of us. This is a personal finance show on money, how it works, how to invest it and how to live without worrying about it. |
| 0:12.0 | I'm your host David Stein today's episode |
| 0:14.4 | 296. It's title Why Do Negative Prices Exist? Last week the price of the May 2020 West Texas Intermediate Crude Oil Futures |
| 0:28.0 | contract known as W.T. I fell to as low as negative $37 per contract. |
| 0:35.0 | That means the holder who was long oil was willing to pay to exit the contract. |
| 0:42.0 | CMBC markets reporter Pippa Steele to exit the contract. |
| 0:42.6 | CMBC markets reporter Pippa Stevens wrote, |
| 0:46.2 | On Monday, for the first time on record, West Texas Intermediate, |
| 0:50.4 | the US Oil Benchmark plunged below zero and into negative territory. |
| 0:56.6 | Before Monday, many thought this was impossible. |
| 0:59.6 | Maybe, just maybe it could drop to zero, effectively erasing all value. |
| 1:04.4 | But negative territory seemed unimaginable, |
| 1:07.6 | not least because it's hard even to wrap one's mind around it. |
| 1:12.4 | Pay someone to take your oil? |
| 1:15.0 | In this episode, we're going to see why oil prices went negative. |
| 1:19.0 | We'll also look at other examples of negative prices and why they exist and what we can learn from them. |
| 1:27.0 | The W.T. I futures contract has a physical settlement, which means whoever holds the contract when it expires |
| 1:35.3 | receives a barrel of oil. The contract settles in Cushing Oklahoma that's where |
| 1:42.0 | that barrel of oil is delivered. If you own the contract, that's where you're |
| 1:46.0 | going to get your oil, or at least arrange for somebody to store it for you. |
| 1:51.6 | U.S. crude inventories are near an all-time record high and in Cushing, Oklahoma, 70% |
| 2:00.1 | of the storage capacity was full as of mid-April and a Reuters article suggested that most of the |
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