Oil – The Black Plague.
By Chris C. May 2020
On April 20th 2020 the price of oil in the futures market went negative $35.00 per barrel. What does this mean for the price of fuel? Nothing!! That’s if you live in New Zealand. Elsewhere around the globe prices have dropped. So why has the price all of a sudden gone negative? It has to do with the storage of oil. Because of the Covid 19 scare there has been a lack of demand for what once was black Gold.
Everyone who consumes oil and it’s by products are safe and sound in their homes with their vehicles left idle. This has flooded the market with an over-supply and has burdened the storage facilities that hold bulk oil whether it’s at the refinery side or the distribution side of the market. I am not an expert on futures markets but I will hopefully give “you” the reader a sound condensed explanation on market theory here.
There is a disconnect between futures prices verses actual commodity spot prices. On one hand The Futures (virtual) price is based on an entity (market trader) taking out a contract at a particular price in the future for a commodity.
In this case when the contract was due for April delivery, unfortunately the buyer/s were unable to take delivery as they may not necessarily be in the oil industry and are without the facilities to store the commodity. They then panic sold off their position to a point where they had to pay another entity to take it off their books to avoid hefty storage charges. There is also a big probability that next month’s due contracts are going to make the futures market in oil even more dire with maybe -$100 price per barrel (PPB).
Normally traders would make a huge profit on their forecasting but in this situation they have got it wrong by a long shot and are now having to pay dearly. There is no doubt, there are some ‘broke’, brokers out there that have up until now, done well in the virtual oil markets by trading this way.
On The other hand the commodity spot price that deals in the physical oil market has also dropped significantly due to the same dilemma to storage. The PPB is under the $20.00 mark which makes it very challenging for those in the oil industry to make a profit. This could well lead to oil companies as well as exploration and refining companies to go into liquidation. This would then have a drastic effect on global economies, especially those reliant on oil, which is 100% of the industrialised world.
Mass unemployment is set to stalk those associated with these industries. Currently the storage units are full of over supplied affordable supply and there are tanker loads anchored in ocean streams all over the world awaiting dis-charge. I fear that as lockdown continues of citizens that the scenario I have just professed will come to fruition.
From there we could see an internationalising of the oil industry where a few at the top may be cornering the market to have total control. This I call global socialism, the same entities bailing out nations with debt through central banks could be sitting back waiting to do the same with oil to create that total global control and manipulate future pricing.
With this scenario in play we may see over supply rapidly turn to high demand as the new oil conglomerate which I will name ‘The Beast’ struggles to maintain the output required as countries try to get back to the ‘old’ normal. ‘The Beasts’ struggle to maintain this imminent situation would be due to liquidated companies within the oil industry including exploration, refining, transportation, storage and fuel outlets hindering production and logistics.
There is also another scenario that may play out here and that’s the possible demise of the US dollar as it was introduced in 1971 as the Petrodollar to replace the then gold backed dollar. This association with oil and the fact that the central bank of central banks, the non-federal, Federal Reserve, which is the lender of last resort and is currently bailing out central banks throughout the world, to supply individuals stimulus money to get them through their government enforced global lockdown due to a pandemic, or what many are calling a plandemic.
With a lack of petrodollars buying oil and unprecedented money supply (debt) to the world, a financial pandemic may well have been unleashed upon us with the symptoms being out of controlled global inflation. The contagion would spread from currency to currency until it roosts where it was manufactured and the USD would plummet into the abyss.
This financial pandemic may prove to be more violent causing more loss and pain than the Convid 19 strain that has had us locked up in our homes indefinitely. What the future brings is uncertainty, we need to brace ourselves for massive financial change, there is no doubt going to be data showing unprecedented unemployment, mortgage stress leading to foreclosures, business failures and liquidations, suicides and stress related illnesses.
With the global shut-down, all this stimulus as well as in countries where fuel is heavily taxed there’s another problem evolving and that is; where will the revenue governments are dependent on, come from?
Watch out and be concerned about negative interest rates, as when the banks go negative they will have a continuous supply of peoples savings that you, the people, have chosen for them to safely store for you in their care, they will charge you weekly for that ‘safe storage’ and no doubt the government will hop on board and take a slice of that for themselves. Watch for death taxes and capital gains taxes to be introduced if your government hasn’t already implemented them and beware of increases if they have. Watch also for increases in GST, VAT etc. if implemented in your country or do not be surprised if your government implements a similar tax.
A great way to help protect yourself from this is to invest in PM’s (precious metals), both silver and gold are safe havens in times of financial crisis and it’s possible that the gold price does the inverse as to what has just happened to the oil market. The reason I say this is because what has happened in oil throughout this financial crisis (not health crisis), the opposite is happening in the PM’s markets. Where the floor has collapsed on oil the stratosphere could be opening up for the metals to skyrocket.
Currently there’s been a rush on physical metals to the point that demand has outpaced supply and with refineries and mines shut through ‘Corona Virus’ as well as some investors asking for physical metal from their ETF (Exchange Traded Funds) holdings there becomes extreme pressures on price.
Like the oil market there’s futures trading in metals and the futures sets the spot price. However, the spot price is dislocating from the actual price, whereas the spot to actual would normally produce a minimal margin for the seller, these premiums have increased quite substantially.
So, if you are interested in PM’s as an investment then please look at the spot price verses the actual physical price and whether you would rather be in physical or an unbacked gold holding. I would prefer to own physical because it’s nobody else’s liability, therefore if you hold it, you own it!! Therefore, possession is nine tenths of the law!!
There are other safe ways to own the metal without the hassle of safe storage etc. and that’s to own mining stocks, these tend to go up along with the market and sometimes depending on the companies’ fundamentals can have a greater return than the metal itself. If you are in America and have an IRA you can see this article on www.goldandsilverlinks.blogspot.com and also discover another way is to have your IRA invested in gold. Please do not regard this as financial advice as I am not a financial planner or expert, please do your own due diligence.
Caleb Trading Ltd,
69 Paul Faith Lane,
RD1 Te Horo,
Ph ++64 (027) 2305848