Keep an eye on the Stock Market.

[old man emu]

While most of the World has been concentrating on the economic effects of COVID, there's been a collateral damage to the USA's economy as a result of the oil production war between Saudi Arabia and Russia. The Saudis want to reduce production to maintain price, but the Russians have bumped up production to bankrupt the Saudis. As a result, there is a glut of crude oil on the market, and countries, especially the USA are running out of storage space. Weighing on crude prices is concern that global crude storage is nearing capacity. South Korea on Monday said it had run out of commercial crude oil storage space, making it the fourth Asian country to run out of storage space. Goldman Sachs on Sunday said it estimates the global oil market may test its storage capacity limits in as little as three weeks.

 

Warnings that availability of storage at the Cushing hub in Oklahoma, the delivery point for WTI futures, will continue to be an issue in the coming weeks and could result in "volatile price movements" in the June WTI futures contract. West Texas Intermediate (WTI) crude oil is a specific grade of crude oil and one of the main three benchmarks in oil pricing, along with Brent and Dubai Crude. WTI is known as a light sweet oil because it contains 0.24% sulfur, making it "sweet," and has a low density, making it "light." It is the underlying commodity of the New York Mercantile Exchange's (NYMEX) oil futures contract and is considered a high-quality oil that is easily refined.

 

Gambling in the Stock Market value of WTI futures is done by purchasing a contract to buy crude oil at some future date at a price set in the contract. The gamble is that when it comes time to pay for the oil, the price has gone up and you can sell the contract at the higher price. You win if you sell the contract to an oil refiner at the higher price. If the price of crude drops, you lose. The gamble is also based on the delivery of the oil. If the contract related to, say May deliveries, the gambler has to off-load the contract before then, or they have to pay for the oil and accept delivery. Not many Wall Street dabblers have the storage farms to accept the deliveries.

 

So, we have a situation where gamblers placed their bets based on earlier higher prices and the usual production levels of crude oil. The Saudi/Russian trade war, COVID and the Northern Hemisphere Summer have pushed unrefined oil capacity to its limits, so there is little or no more storage capacity. These gamblers are going to have to sell off their other share assets to pay for the crude at much lower prices - even negative prices - to fulfil their contractual obligations, then they will have to find and pay for storage because the sellers won't store it for them.

 

This big sell-off of shares could crash the Stock Market in Wall Street. We know that when the US share market sneezes, the World's economy gets the 'flu. So if you get your income from your share portfolio, keep a careful eye on the several Stock Markets around the World.

[Jerry_Atrick]

A nice precis, @old man emu. While I agree with the general sentiment of the write up, a few things have to be borne in mind.

 

Firstly, no investor wants to hold a futures contract during delivery pricing period (week or month depending on the contract). I can't recall the exact terminology, but usually an exchange rules will prohibit trading some time into the delivery pricing period. Most institutional investors have rolled over their paper in the commodity to the next suitable delivery period well before it is due because in the pricing period, the financial risks are huge and their market risk limits won't let them carry that sort of risk (in the EU, it is illegal for retail asset funds, of which penson funds are a part of, to carry more than a certain amount of such risk).

 

Also, they have specialist asset/portfolio managers analysing the markets all the time, often with very sophisticated mathematical model and increasingly AI. It doesn't get it right all the time, which is why they have traders to look at qualtitative signals of the market. While you can purchase long futures contracts (where you take possession), you can go short was well, which is where someone guarantees to buy the quantity of oil for a pre-determined price.The trick is, on that day, you have to buy the oil at spot to sell it on. If the spot price is lower, you make a profit. I think it was last week, WTI price was -$45/barrel.. that's right the holders had to pay refineries or shippers $45/barrel to take it off their hands. If by short contract was $45/barrel, I would be getting $45 from sometome to take it off their hands and then $45 from the long side of my short contract to sell it to them, getting $90/barre that day.. NBot a bad effort in the current climate.

 

Again, risk management of institutional investors would have them rolling these contracts out long before the delivery period.

 

It has been a while, but you don't sell your long or short contract and buy another; from memory (I was only looking at futures a short time), you buy the opposite side of the existing contract (so if you have a long contract for delivery in May, you buy a short contract for the same quantity for delviery in May) and this forms a perfect hedge. Then you take a new contract in the delivery period you want to bet on.

 

Quite often, in the lead up to the pricing period, it is the speculators and in the case of oil, refineries or sovereigns that are playing off each others while the investors are out of the race.

 

Of course, it doesn't always work out thay way and occasionally investors are left holding the bad baby...

 

But... for a pension fund, they will diversify their assets to diversify the risk.. And the have to hold a certain amount of cash and other assets easily converted to cash to cover for expected losses and a guesstimate of unexpected losses. At present, until a new regime comes in at some stage, the key risk meaure is Value at Risk (VaR) which effectively calculates the likely losses due to unfavourable price movements of a portfolio over a potential unwind period.. They have to already hold cash based on a 60 day rolling average of VaR (and there are operational and credit risk charges as well) to cover potential losses.. it's a brief overview and there are many nuances, but the point is the will do their best to offload the risk long before delivery is required.

[facthunter]

I don't know what it's like these days but to trade in futures on the ASX you had to do an approved course. I doubt it's changed. Nev

[old man emu]

I don't profess to be a Stock Market guru, so I bow to Jerry's greater knowledge, as any is better than mine. I might be a bit pessimistic in these uncertain times, so I thought I'd put the opinion out for discussion.

 

Maybe the superannuation business has regulated operating procedures, so I wonder if my opinion would apply to other stocks.

[Jerry_Atrick]

That is not to say the stock market (or any of ther other financial markets) are perfectly safe. The economic impact of Coronavirus is going to start having an impact and it will be some time to rebound.. Your suoper fund administrators are under a fiduciary duty to manage your money prudently within any "elections" you make - these are when you choose the investment strategy to use - such as Al Aus Shares, Mixed Equities/Fixed income, etc. Of course, the fund managers and backs have been lacking integrity lately from what I hear. For those who are retired, their Superannuation fund is ususally converted and an annuity of some sort and this should be a constant income as annnuities are traditionally insrance against you living too long. For those about to retire, it is not good news as yields will be up and prices therefore will be down.

Edited April 29, 2020 by Guest

[willedoo]

The Saudis want to reduce production to maintain price, but the Russians have bumped up production to bankrupt the Saudis.

Just a few points to clarify this statement. Harming the Saudi economy could possibly be a byproduct of Russian actions, but not an intention. The two countries do a lot of trade weighed heavily in favour of the Russians, not to mention future export deals in the pipeline. If Russia was to intentionally bankrupt Saudi Arabia, it would be akin to us intentionally destroying our iron ore and coal markets in China, albiet on a smaller scale.

 

There are a lot of factors behind Russia's previous decision to walk away from re-negotiating the OPEC Plus agreement on limiting production. The main thing concerning Russia is the risk of losing further markets. The Saudis have been screwing the Russians over by selling undercut priced oil into Russia's Asian markets, and recently they have also been undercutting Russia in some of their European markets. Russia is best placed to ride out low prices. Their economy is diversified with oil and gas making up about 20-30% of their income. With their large gold and forex reserves, they can balance their budget for a few years with oil at $20 per barrel.

 

Saudi Arabia on the other hand, is not doing so well. Their economy is narrow and their budget is very dependent on oil revenue. Saudi production costs are lower than Russia's, but if the price stays low long enough, the Saudis have to either borrow money to run their budget or further deplete their reserves. If that happens, Russia would be hoping the Saudis stop poaching their markets.

 

Another problem the Russians had with the negotiations was that the deal would have seen Russia, the Saudis and OPEC nations all cut their production without a production cut from the U.S.. This is another sticking point. Since the rise of the U.S. shale oil and gas industry turned the U.S. into a major exporter, the U.S. has tried hard to take away Russia's markets. A twofold goal of making money for America and breaking Russia. In cases where the U.S. can't compete on price, they resort to CAATSA sanctions to try to achieve their goal, one case being Nord Stream 2.

 

That's basically where Russia was in the negotiations; being asked to cut production while Saudia Arabia was already undercutting to take Russian markets, at the same time seeing the U.S. in the wings at full production waiting to pounce on remaining markets. As it turned out, the coronavirus factor kicked in and the U.S. has had to cut production anyway. From now on, available storage will decide it all. That and how quick the economy rebounds.

Edited April 29, 2020 by Guest

[old man emu]

With their large gold and forex reserves, they can balance their budget for a few years

 

You knew it was coming, didn't you.

 

[pmccarthy]

Castlemaine produced a lot of gold in the past.

[Jerry_Atrick]

An you should always keep fome fourex in reserve

[old man emu]

My wife tells the story of when, just after the family arrived in Australia in 1964, her mum needed some sticky tape. Being English, she asked in the shop for some Durex.

 

This is what she meant:

[spacesailor]

OIL STORAGE! .

Russia were at one time putting crude oil down in salt mines.

Drill a pipe line next to it and it,s filtered dy way of that salt.

spacesailor

[willedoo]

OIL STORAGE! .

Russia were at one time putting crude oil down in salt mines.

Drill a pipe line next to it and it,s filtered dy way of that salt.

spacesailor

That's got the environmental agencies a bit worried. The main salt mines were at Ulsolye Sibirskoye, just west of Irkutsk in Siberia where they make the Sukhois. The oil wastes stored in the old mines are a stone's throw from the Angara river and the concern is seepage into the river if the boreholes blow out. The bigger problem there is the old abandoned chemical plant. Large amounts of mercury have leached into the soil and possibly the river as well, and then there's the chlorine and other chemicals still in abandoned storage.