This is a good question. The fact that people are not buying the May future at -$37/bbl and selling the June contract at $20/bbl tells you that Cushing storage must effectively be full and that the theoretical storage figures quoted in research are not practically usable (at least at short notice). It's very hard to imagine any practical means of storage that isn't wildly profitable to utilize for $57/bbl/month.

Mostly the storage cost. Let's go extreme, say you managed to grab the contract at $0, which may actually happen today. Now you need to 1) Find transportation and storage 2) Sell it on the market as quickly as possible, at a reasonable cost.

Pretty tough TBH, unless someone is planning a war in Middle East and is grabbing up the contracts and you know about it...

Because of storage costs and uncertainties, it wasn't only the saudi-russia fallout that caused this - demand has literally flatlined comparatively due to lockdowns everywhere.

>why aren't people buying at $2 a barrel now and storing for one month, selling the June contract at the same time and collecting a $20k profit per contract?

Good question. The answer is because they don't think it will be profitable. Why aren't you?

Me, personally, because I don't even have a futures account at a broker that will let me take physical delivery, nor do I have any experience whatsoever renting tank space at the Cushing facility (which I didn't even know existed before today). But I guess the answer to my question seems to be that the cost of storing one contract worth of oil will, unbelievably, be more than $20,000 for the month.

I've never been to Cushing Oklahoma. I feel like it should be possible to build a big tank in a week or two. Why isn't available storage space skyrocketing?

I honestly don't even know if I can fathom how you could get permitted to build such a tank in a couple of weeks, but the answer to why that isn't happening _right now_ is probably because nobody wants to lay out a bunch of capital for a business that might do well contemporaneously but that has no future.

Either things settle back down to normal at some point, in which case you've made some revenue, but probably not recouped your investment. The Cushing facility managed to build 7 million bbl capacity in the early 90s for $60 million. I expect it would cost $80-100 million to build today. Current (inflated) storage costs are 50 cents per barrel. Let's say that rises a LOT and skyrockets to $2 - that's a gross of $14 million per month. Assuming $0 in overhead, you'd need for this contango to last for another 7 months to break even. If we assume something like a 30% margin, then you'd need it to last around two years.

Alternately, things don't return to normal. The market becomes depressed enough that airliners barely fly, and the global world consumption falls. The oil you're storing becomes cheaper to the point that storing it costs more than buying it, and there's nobody to sell it to. Your customers default, and your investment quickly becomes the thing that bankrupts you.

7 million barrels * $30 a barrel = 210 million just to take the oil. Plus $20 a barrel when you sell it brings you to $350,000,000 in revenue on a 7 million barrel tank. What am I missing, other than not being able to build the tank fast enough?

I mean, if you have a spare $300 million lying around, that sounds like a fantastic arbitrage opportunity, and (napkin math time) if you're holding the barrels for more than 10 months, that'd be the way to do it.

You are probably right. And given that June futures went down since yesterday, and the May futures went up, someone is probably doing that right now.

Great answer! Now let's forget about storing to sell later at a profit, at negative 37$, can't you just burn it for a profit?

Assuming you can transport a 100+ pound liquid filled drum to a disposal facility that meets federal guidelines for less than that cost, and don't care about the environment, absolutely... but the real trick here is in knowing that the people who are already using oil and have the capacity to store it ... are... so other than just burning it, for a couple hundred million, you could probably supplant your stationary oil consumption with a non-petroleum alternative.

It is ironically the portability of oil-refined products (gasoline, diesel) that makes it so appealing for things that aren't stationary -- planes, cars, etc.

There are regulations covering storing enormous quantities of oil, including certification of the holding tanks etc.

For example, any container over 55 gallons is subject to EPA regulation and counts towards the total permitted site quantity. Storing more than 1,320 gallons above ground requires the site to have an approved SPCC (Spill Prevention, Control, and Countermeasures) plan.

You can store 42,000 gallons below ground but that requires excavation, permits etc.

Basically: it's difficult to do on short notice.

Further reading: https://www.epa.gov/ust/aboveground-storage-tanks

There is a little bit more to an oil tank than just steel walls. You need proper foundations, fire prevention systems, disaster plans, probably get hooked up to the pipeline network, etc etc etc. Even if it were quick, the amount of oil being pumped up is massive and you need more than a few tanks to store it all. Finally, tanks are long term infrastructure and it might not be profitable to build out storage too much just in the hope of catching once-in-a-lifetime negative pricing events.

Yeah, it's worth building these tanks safely. There was tank fire last year in Bay Area after a quake: https://www.youtube.com/watch?reload=9&v=KMZjfWRXgTs Even if there is different level of risk and safety concern, and air quality regulation in rural Oklahoma vs urban CA bordering a highway, these can catch fire dramatically.

One point made when that fire occurred was that the tanks are placed in earthen basins, so that when tank fails, the flaming fuel just fills the basin, minimizing risk of spreading to neighboring tanks.

Speaking of oil tank fire prevention, videos of foam fire suppression systems are pretty impressive. A gasoline tank fire goes from massive flames billowing into the sky to totally extinguished in 40 seconds. For example: https://youtu.be/OxLPvNdv2t4?t=210

It's not possible to build a tank in two weeks, even if you had all the material and equipment at the ready. Plus, capital intensive for what may only be a spike in storage.

These physical goods are much harder to store than bits.

> I feel like it should be possible to build a big tank in a week or two.

When is the physical settlement of the contract? My understanding is that physical settlement of the May futures contract is 21 April (that is, tomorrow).

So you don't have a week or two to build your big tank. It needs to be finished tonight.

https://www.cmegroup.com/trading/energy/crude-oil/light-swee...

Looks like first delivery isn't until may 1 according to that page.

Our intuitions are so different I'm not sure if you are joking or not.

My guess is that the build time is 1-2 years with 5 years of permitting up front. I also imagine building capacity is capped with a limited number of trained engineers/welders.

Many have answered about storage costs. Easy way to think about it might be a grocery store.

You hear about a sale on cereal for $0.01 a box. Great deal but then you find out that you can't walk there, you can only take Lyft/Uber and it costs $100 each way to get to the store. So in reality its not as good a deal as it sounds.

>you can only take Lyft/Uber and it costs $100 each way to get to the store

Hard to follow this analogy

The part about depending on only semi-reliable third parties for your logistics, or the part about the supply chain costs being 1000x your material cost?

The part where a trip to the grocery store costs $100

Surge pricing because everyone wants to get the deal there

What's stopping you from taking a car or a bike ride to save $100?

Because you can't just rent a U-Stor-it space, and dump a bunch of full oil barrels into it. You need a specialized facility.

And all of those facilities are full. The ones that aren't are charging an arm and a leg for storage services.

What about tankers?

Also full. The proportion of the global tanker fleet that is just full of oil sitting off coast near refineries is at an all time high.

A lot of speculators were betting that oil prices were going to go up and had rented ships and filled them with oil they though was cheap, before COVID-19 even hit. Since then, oil prices have absolutely cratered.

How do these tanker contracts work?

Are speculators leasing the tankers on a month to month basis? What happens when/if the tanker isn't offloaded at the end of a contract?

Typically most tankers are owner operated, under a long-term charter or on the spot market they are doing jobs that days/weeks/months

It’s a pretty efficient market

See this article (Suspect rates have climbed even further as the storage trade becomes more lucrative.

https://www.forbes.com/sites/gauravsharma/2020/03/12/superta...

What are you going to do with the oil after one month?

No one needs oil right now so if you take physical delivery it’s going to be sitting there for longer than a month.

> selling the June contract at the same time

They would not be the one holding that particular bag.

if only arbitrage was that easy...

That's literally what futures contracts are for.

In a discussion about negative future prices no less. If buyers could refuse physical delivery, that's what they would be doing now, not selling at negative prices.

You still have to store the oil for a month. Which is expensive right now. Which is precisely why the May future is so cheap in the first place. I'm just rebutting that you will be stuck with the oil after June. Since they specifically said, they would sell a June contract immediately.

It just implies that any profit made by arbitraging June contract with May by taking physical delivery doesn't cover the storage costs (which is hard to believe at $22 difference but that's what market seems to indicate).

Just a guess, but maybe the consensus is that June is going to be the same (or worse) as May and they are going to have trouble unloading those contracts?

It may come to the point that you're paying some to take the contract.

You're selling the June contract right now. There will be nothing to unload. Whoever is holding your June contract when it expires will be the one left holding the bag (well, the barrels). That's the whole point of futures.

The problem is that you have to store the oil for a month which is pretty expensive right now.

But then the price in June should also be down.

It is down, it's just not down to $0.

Not yet it's not

Because storage is not free, and if that were such obvious profit, why would the guy writing you a May contract not do that themself, and write June instead?