The “free market” folks need to call the “socialists” in Chicago City Hall to learn about business disaster preparedness. It is clear that the folks in city hall that occupy the public health offices are better at preparing for market forces than the “free market” capitalists. I remember vividly my 7th grade civics teacher telling us about the gold standard and the supply demand curve. Very simple stuff and still relevant. The price of anything, if there is enough of the stuff… will go negative. It has been a law of basic economics for a long long time and is the first thing we generally learn as kids in school. Those that want to study the dismal science then need to wait until we can take that high school econ elective Jr. year. But at least we all start out with the same understanding of supply demand. 100 years of carbon industry hubris are at work here and what is preventing some pretty big players from seeing the very plain economic realities at play.
How is it that a group of public health officials in a (probably) windowless office knew enough to stockpile masks, ventilators, gowns, gloves and other PPE and a group of millionaire traders could not plan for the reality of negative commodity prices? Pandemics have happened for all of history and will continue to occur in the future. When the next one happens will all the big shots say ….’who saw this coming..?” The City of Chicago Department of Public Health. I think it can be boiled down to one thing. When you are a public servant in charge of saving millions of lives, you need humility. When you are a corporate executive in charge of saving millions of dollars, you need hubris.
There was an article in the WSJ claiming negative prices would tarnish the reputation of the CME. I see exactly the opposite from the CME. They saw that prices could indeed go negative on a physically settled contract. You can’t store this stuff in an abandoned building. Global storage facilities have never been built out at the same rate as production capacity. It did not make economic sense. We were using the stuff as fast as producers could pull it out of the ground. Harold Hamm and others are now paying the price for that lack of storage build out.
Here we are to today and Harold Hamm is having a hissy fit. Poor little billionaire… Settle your trades and honor your contracts!!! THAT is what is at stake. I am a former floor trader at the Chicago Board of Trade. My mentor was a great bond futures local. He told me “Robbie, don’t trade the crude complex, it’s manipulated.” Until now I took that advice, I have been short crude since late Jan early Feb. There is no more honorable way to do business and execute a trade than settlement of a uniform futures contract. This will remain the case with Mr. Duffy running the CME… Mr. Hamm could not be more wrong when he claims that the system failed miserably. The “system” failed, yes, but not the CME system. It was the 100 year old oil industry paradigm that failed and the parabolic hubris of these last 100 years is now crashing down all around us.
If Mr. Hamm had the foresight to see we were going to run out of storage, he could have built more storage and charged people to take the oil off their hands and store it for them. Mr. Hamm would then collect/settle a “negative price” to cover his cost of construction and carry. Would he have agreed to a force majeure if on the other side of the trade. This is the kind of creative destruction that free market guys like to talk about. Mr. Hamm, do you have change for a paradigm?
For the foreseeable future the price of the physically settled WTI futures contract will experience negative price shocks on a rolling monthly basis until storage frees up or someone builds more and then charges the price necessary to cover the costs of construction. If Mr. Hamm needs a place to store his oil, he should start building tanks.