For my friends who ask how oil was trading at negative $37/bbl last week.
An Economics Lesson in Oil Futures
Analysis by Thompson Energy – Understanding how crude oil was trading at minus -$37
Imagine the following scenario: You pay $500 today and commit to receiving a hooker at your house in 15 days because your wife will be traveling. This is called a Futures Contract. Unfortunately, lockdown came and you are locked down with your wife at home for the next 60 days. This is called “now you are screwed” and you cannot fulfill the escort company’s Futures Contract.
So now you do not want this woman to show up at your house at all, and try to find anyone of your friends to pass off this futures contract, any neighbors or anybody else. But you find no takers because now everybody is under lockdown with their wives and families. You find you cannot sell this hooker commitment because nobody can take delivery of the girl, and there is nowhere to stash her. Nobody can receive the hooker at home anymore. Everyone is in full storage. To make matters worse, not even the pimp (Chicago Mercantile exchange) who sold you the hooker contract has more room to receive girls because his house is full of girls out of work under lockdown.
So now you will have to pay anyone just to take the girl off your hands. Someone tells you I will take the girl off your hands BUT you must pay me $37 to do it. This is called negative price when you deliver the girl that cost you $500 to the willing buyer and pay him (me, in this case) $37 to take delivery. Got it? This, in a nutshell, is what happened to the Oil Futures Market last week. No need to thank me.