Last month, oil markets shocked the world when the West Texas Intermediate (WTI) crude benchmark plunged below zero. And oil prices didn’t just fall a little bit below zero, they hit nearly -$40 per barrel. This crash of stunning proportions was the result of a series of unfortunate oil industry events. First, the spread of the novel coronavirus and the resulting industrial slowdown around the globe led to a severe decline in oil demand. When the leading OPEC+ members of Saudi Arabia and Russia began talks to strategize their response to the drop in demand, the talks quickly devolved from dispute to all-out oil price war, which produced a massive international oil glut. As the world’s oil producers continued to add to the oversupply with ever-decreasing demand for the oil they were pumping, global oil storage began to fill up. In the United States, lack of storage, particularly at an essential storage facility in Cushing, Oklahoma, led to a moment that the liability of having to find somewhere to store the oil outweighed the benefits of owning the oil at all. Boom. Negative oil prices.
While the world looked on in shock and awe as the WTI benchmark closed at minus $37.63 a barrel on Monday, April 20, one England company was busy being paid to buy oil. This week Bloomberg reported the story of BB Energy, a London-based trading house and the “One Trader Who Cashed in on Subzero Oil Prices.”
As reported by Markets Insider, BB Energy “bought 250,000 barrels of oil and secured a rare payout at a time when oil prices turned negative, causing jitters in markets and leaving most other traders scrambling to find storage options across both sides of the Atlantic.” This rare payout was made possible by the fact that BB, unlike most of its competitors, had a golden ticket: available oil storage. The London trading house, which “trades 20 million metric tonnes of crude and petroleum products annually” according to Markets Insider, was in a perfect position to capitalize on the crash.
“BB Energy bought around 10% of all barrels of WTI crude futures for delivery in May” on the day that these barrels were priced well below zero, “meaning most traders apart from BB Energy had to effectively pay traders to take the oil off their hands.” Reporters were unable to confirm whether BB Energy is still sitting on all the oil that it was essentially paid to buy, nor do we have exact figures on how much they paid (or, more accurately, were paid) per barrel. But it’s safe to say that the contrarian company made a small fortune.
And while this may seem like a well-timed play during a once-in-a-lifetime market fluke, that may not be the case. While OPEC has imposed massive production cuts, and Saudi Arabia, Kuwait, and the United Arab Emirates have pledged to impose even more austere measures than those they were already beholden to, oil markets have not yet begun to recover in any serious way. There have been some positive movements, but oil demand remains weak and storage remains at a preium. In fact, just this week, US Commodities regulator the Commodity Futures Trading Commission said to prepare for this strange moment in history to repeat itself. The commission “issued a rare warning on Wednesday urging market participants to prepare for a repeat-case scenario of negative prices for the June WTI contract.” More specifically, the notice read, "We note that we are issuing this advisory in the wake of unusually high volatility and negative pricing experienced in the May 2020 West Texas Intermediate (WTI), Light Sweet Crude Oil Futures contract on April 20 (the penultimate day of trading and expiration of the contract."
By Haley Zaremba for Oilprice.com
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