"Negative" Oil?

I made the comment on Saturday’s call, “we had negative interest rates, now we wait for negative oil prices”. I received a few questions because the negative price of anything makes no sense right? Well actually it does. Because demand has dropped so precipitously and production has continued unabated, supply is piling up. In the real world this is a huge problem because the oversupply must be stored somewhere. Oil is now being stored on previously empty tankers because land based storage facilities are overflowing.

It is now estimated that in roughly 30 days there will be no more spare capacity for storage. It will be at this point producers will need to “pay” (as in accept a negative price) for produced oil. Crazy yes but also reality. Beyond the obvious that low (or negative) oil prices will destroy individual companies and thus the entire industry, there are other ramifications more nuclear to the financial and real economic systems.

First, think of the unemployed. The oil patch will be forced to let several hundred thousand workers go…and then of course the ripple effects. But the bigger hit will be the ripples financially. Think of all the debt that will default? The producers themselves will struggle and many will fail. When they fail, payments will also to various areas including and specifically on their debt. Who owns the debt? It is spread far and wide but these bondholders who previously believed they sat on secure assets will find out they are also the big losers.

Another death will be the “petro” dollar. The dollar has been supported from oil revenues being reinvested into Treasuries since 1973. Yes the Fed will step in to replace the demand but this is outright monetization and anyone with half a brain knows where this will end up. In fact, oil nations who previously supported the petrodollar will likely be seen as sellers of US Treasuries just to stay afloat adding more pressure to bond prices and thus interest rates!

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