Yes, Commodities (or at least their futures) can be worth less than nothing

At some point on the morning of Monday, April 20, I noticed that front-month crude oil futures were worth about $4 per barrel. “Shockingly low,” I thought. “Crude oil will surely be worth more than that eventually.”

Then I shrugged and went back to a different project, because I didn’t really care. It’s been a long time since I’ve had the stomach to dabble in crude oil speculation and the $7,500 margin calls that go along with it. I felt entirely confident that commodities — the physical stuff we use to make the world go ’round — are always worth something and can never be worth nothing. A barrel of crude oil or a bushel of corn contains usable energy, and even if the supply and demand is currently unfavorable, these commodities can be stored away until somebody does demand that energy.

Stored away. Now, there’s the sticking point.

When retail investors get started trading commodity futures, they’re usually spooked by the physical delivery mechanism of the contracts. “If I speculatively buy a 5,000-bushel corn contract,” a rich dentist in Florida might wonder, “and I don’t get out of the contract in time, is someone going to dump five truckloads of farm product here on my beautifully manicured lawn?” No, they’re always assured. Physical deliveries at the expiration of a futures contract must take place at a warehouse facility licensed by the futures exchange. For corn, these facilities are commercial elevators near Chicago, Illinois.

For the U.S. NYMEX light sweet crude oil futures, here’s the delivery procedure (in part) from the CME Group’s website: “Delivery shall be made free-on-board (FOB) at any pipeline or storage facility in Cushing, Oklahoma, with pipeline access to Enterprise, Cushing storage or Enbridge, Cushing storage … At buyer’s option, delivery shall be made by any of the following methods: (1) by interfacility transfer (“pumpover”) into a designated pipeline or storage facility with access to seller’s incoming pipeline or storage facility; (2) by in-line or (in-system) transfer, or book-out of title to the buyer; or (3) if the seller agrees to such transfer and if the facility used by the seller allows for such transfer, without physical movement of product, by in-tank transfer of title to the buyer.”

For the futures traders who found themselves still long in May crude oil futures on Monday (the day before the contract expired, and while there were no daily limits on how far the price could move), we can see that the worry wasn’t about receiving tanker trucks full of light sweet crude delivered to their home address in May. The worry was about how on earth they could be called upon to find oil storage and pay for oil storage, in Cushing, Oklahoma.

Here’s the trouble: the oil storage capacity in Cushing, Oklahoma, was already 72% full as of April 10 EIA data, with inventory rising about 10% each week for the past three weeks. The remaining 21 million barrels’ worth of Cushing storage capacity is likely already spoken for. Oil traders who found themselves facing delivery on expiring May futures contracts could maybe try to buy storage capacity from some existing industry lease-holder, but at what cost?

That’s why the price of the futures contracts was suddenly negative, a condition this world has never seen before, and which most commodity traders probably never considered could happen.

Maybe crude oil would eventually be worth $10 per barrel in June, but if the desperate physical owners had to pay $50 per barrel in storage fees to carry it through the next couple of months, that meant the value — at least during the peak panic of that futures squeeze — was equivalent to negative $40 per barrel.
In the first 30 minutes after the May crude oil contract turned negative, 6,750 contracts were traded at prices between -$1.43 and -$40.32. There’s no way to know the price levels where those traders entered those contracts, but it’s safe to say that a lot of speculative money was lost on Monday. Commercial oil industry participants presumably rolled out of their May contracts before this timeframe and already have their storage needs lined up for the month.

Storage problems will continue amid the profoundly bearish supply and simultaneously profoundly bearish demand scenario for oil. In the grain markets, the prices in later months tend to be higher than the prices for nearby months (called carry spreads or “contango” in energy lingo) to account for the cost of storing the grain. Oil markets typically display the opposite structure (backwardation), with July 2020 crude oil $0.25 per barrel cheaper than June 2020 crude oil, for instance. Since the sudden COVID-19 lockdown, recession occurred and the world’s pumped oil had to scramble to find long-term storage, and these oil spreads have exploded in the “wrong” direction to unprecedented levels. There is now a contango spread of more than $9 per barrel between the June and July futures contracts. The last time drastic contango was seen in the crude oil futures spreads was in January 2009, at a scale of only $2 to $4 per barrel.

What lessons should grain traders, and grain producers, take from this sudden wake-up call? First of all, don’t get caught with open futures hedges in the last days before a contract’s expiration, unless you’re a commercial operation that’s fully prepared to accept or deliver physical grain via warehouse receipt.

The second lesson, we might think, is to worry that maybe grain prices could go below $0 now, too. However, I’m not sure the real physical grain producers and grain traders should worry much about that. Physical spot crude oil prices haven’t turned negative — it was just (temporarily) the futures contracts that were in danger of receiving delivery at the Cushing-specific location. Physical spot grain prices would likely not turn negative in our world, no matter how bearish short-term supply and demand may get, because again — grains contain inherent value, as energy or as animal feed, and dry grain can be stored until such a time as it is eventually demanded. Even if all the grain storage facilities in America were plugged full, and monthly storage costs were unusually high, farmers can (and sometimes do) just pile grain on the ground. You can’t do that with oil. It wouldn’t be ideal for the grain industry to run out of storage and it would result in some losses, but thankfully it shouldn’t zero out the value of the commodity.

Elaine Kub is the author of “Mastering the Grain Markets: How Profits Are Really Made” and can be reached at or on Twitter @elainekub.

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More Sufficient Freight

In recognition of the approval that came this month from the Iowa Utilities Board, which voted to permit the Dakota Access pipeline to be constructed across their state, I’m linking to a white paper I wrote last year: “Insufficient Freight: An Assessment of U.S. Transporation Infrastructure and Its Effects on the Grain Industry.”

It was published by the American Farm Bureau Federation in July to address how the grain markets get affected when logistical bottlenecks make freight prices skyrocket. In theory, moving Bakken formation crude oil to the Midwest by pipeline rather than rail will help keep rail freight availability more resilient for the grain markets, which have no pipeline alternative. The spiffy maps above show the dark cloud of crappy corn basis that occurred when the railroads were congested — and the hotspots of expensive corn that end users had to pay for when that freight couldn’t get through.

North Dakota, South Dakota, and Illinois (the other states through which the pipeline will run) all previously approved their petitions from Dakota Access, so now it’s a go!