nikol
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CLK0 hits minus 40.
https://www.barchart.com/futures/quotes/CLK20/interactive-chart
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Chuck
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How much oil actually changes hands at -$16 (spot) vs. closing their futures contracts? A producer sold a futures contract because he thought he'd deliver in May, but turns out his contract skyrocketed in value... What to do--close out futures at a profit and hold on to oil inventory? And possibly stop pumping?
What does the buyer do if he has no room to store the oil he thought he'd need? Close out his position at a loss and let someone else store the oil? |
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nikol
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Yes. It's settlement risk.
from contract: "The delivery point is located in Cushing, Oklahoma which is home to 90 million barrels of storage capacity"
So, somebody had to deliver in excess of these 90 Mbrls which is full. Still, the price of oil is becoming effectively less than that in Venezuela during reign of Chavez, when their citizens used to buy subsidized gasoline and convert it into bitcoins.
https://www.economist.com/the-economist-explains/2018/04/03/why-are-venezuelans-mining-so-much-bitcoin
This could be the solution for such low oil prices... and support lovely bitcoin :) |
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CMPT
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| The front June contract settling near zero would require changes to the portfolio construction methodology of many strategies. Many PC models use contract value in some way. Price going strongly negative would be easier to deal with... |
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Kitno
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Speaking to a head of crude at one of the majors - the producers are physically unable to shut production within 2m or so (unless they are willing to permanently destroy wells).
In the US empty drilled wells from the 1970s are being opened and filled up. |
All the soul of man is resolution, which in valiant men falters never, until their last breath. |
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ronin
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> What does the buyer do if he has no room to store the oil he thought he'd need? Close out his position at a loss and let someone else store the oil?
Pays somebody to take it of his hands, what else. How do you think we got to where we are?
> Speaking to a head of crude at one of the majors - the producers are physically unable to shut production within 2m or so (unless they are willing to permanently destroy wells).
Depends on the type of the well, but basically it's a long tube which has to be under certain pressure range, otherwise it collapses. Turn the flow off and its gone. It woud have to be drilled all over again, and it would be more difficult the second time around.
In the short term, it's cheaper to pay somebody to take the stuff.
In the longer term, they would of course have to shut wells down.
Man. I remember what a thing it was when oil first broke $100. Talk of $200 oil and all that. Ten years later, here we are.
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"There is a SIX am?" -- Arthur |
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nikol
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> . Ten years later, here we are
Which thing is biggest oil consumer ex cars?
Tesla and all EVs are taking the roads. They talk now about e-planes too. So, what?
https://www.eia.gov/energyexplained/oil-and-petroleum-products/use-of-oil.php
transportation - 14.16 million barrels per day - 69%
industrial - 5.13 million barrels per day - 25%
residential - 0.56 million barrels per day - 3%
commercial - 0.48 million barrels per day - 2%
electric power - 0.11 million barrels per day - 1%
Electricity generation has big potential, but people use mostly coal, gas, turf, wood, not oil.
UPD: sorry, screwed up the table in copy. |
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Chuck
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| Starting tomorrow, the CME Group (NASDAQ:CME) clearing house will switch its options pricing and valuation model to accommodate negative prices in the underlying futures and allow for listing of options contracts with negative strikes, Bloomberg reports |
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nikol
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Farewell logNormality as fundamental property of commodity prices?
Still, I can imagine the situation where the price of commodity itself remains positive while derivative (futures) sink into negative territory, because it is the contractual obligation which creates such effect.
Not funny question then: under which (today imaginary, but you never know) circumstances stock prices might get negative? |
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gaj
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| I wonder how many automated systems went haywire. Even simple logic like calculating % returns will break, especially at price==0. |
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kloc
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@ Nikol: "under which [...] circumstances stock prices might get negative?"
You'd need to remove shareholder's limited liability for that. Quite a dramatic and unlikely scenario IMO. Business world would be a very different place.
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Kitno
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Being pedantic: unlimited liability companies [not LLPs, a form of 'limited' company] - which exist in England & Wales (although unaware of public ones).
Last crisis there were negatively priced bonds (structures). |
All the soul of man is resolution, which in valiant men falters never, until their last breath. |
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pj
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>although unaware of public ones
Lloyds |
The older I grow, the more I distrust the familiar doctrine that age brings wisdom
Henry L. Mencken |
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Kitno
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| It turns out American Express was too pre-1965. |
All the soul of man is resolution, which in valiant men falters never, until their last breath. |
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nikol
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@Kitno
Bonds are not the same as stocks, they can be constructed as you rightly mentioned.
I know what situations can be:
- negative dividends (not sure how can be done though because dividend is "right to receive", not "obligation to pay")
- govies suddenly order to terminate stock holders. How they can do it? Recall Great October Revolution in Russia or something like "1984".
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Kitno
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| Total Posts: 492 |
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@Nikol
The unlimited liability company highlight was some fun trivia. That said a negative share price would come more likely from an near to/insolvent company 9likely) unable to pay its debts for which the shareholder is liable while shareholder.
In the bond world there's many ways to get negative coupons - the easiest is just omit a floor on a floating payoff - happened a lot last crisis. For a negatively priced bond where the issuer is not in default well that'd more likely be a structured note SPV for many reasons (bond would have been bought back). |
All the soul of man is resolution, which in valiant men falters never, until their last breath. |
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@gaj
That's funny. That was exactly my first thought when I first heard about it.
In addition to the denominator issues, a lot of low-latency C-style systems will use 0 or -1 to mark a field as N/A, since it saves cache lines by avoiding a std::pair. The one redeeming thing is that since this is commodities space, most participating firms probably trade calendar spreads, so their systems might be equipped for negative prices.
I would hope any systems not designed to deal with zero or negative prices had their circuit breakers puke as soon as they saw a bad entry on the MBO data feed, but circuit breakers are rarely a well-considered part of the ATS tech stack. |
Good questions outrank easy answers.
-Paul Samuelson |
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ronin
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| Total Posts: 589 |
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> That said a negative share price would come more likely from an near to/insolvent company 9likely) unable to pay its debts for which the shareholder is liable while shareholder.
My thoughts too. That actually happens with insolvent companies - the new buyer is paid to take them, in exchange for something. Usually continuing employment, guaranteeing some debt, or something else.
Practically speaking, I wonder if it would change all that much.
In intraday trading, you rarely worry about the effects of zero anyway - you are too far away from it. I would guess most HFTs would trade through zero without even noticing it.
Fundamental equity and global macro might have their calculations changed. But mostly on the risk side.
So I'm not sure I really see it. Lognormality is really only a thing for option pricing. |
"There is a SIX am?" -- Arthur |
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prikolno
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prikolno
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| Total Posts: 50 |
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| Think the more likely practical issue is trying to price options at negative strikes, the systems will still run while the models silently fail. Most x86 low latency systems have zero overhead abstractions for null values and zero-robust log approximations, but much fewer firms price options on exotic rate derivatives. |
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gaj
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| Total Posts: 103 |
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| What happens if the stock price trades lower than dividend amount just before ex-div? I guess that would be an arbitrage. But the implication is that the equity futures could conceivably go negative. |
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nikol
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| Total Posts: 1138 |
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Thinking out of loud:
Sorry if some scenarios are weird, but we never know.
Govie hunt on certain stocks in certain jurisdictions might create pressure on cross border liquidity and repo rates can push prices below dividend rate. Dividends can be manufactured, so they stay. ADR arb will get fresh blood. |
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ronin
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> What happens if the stock price trades lower than dividend amount just before ex-div?
Paying that sort of dividend would be fraud. It would be clawed back, and it would result in criminal convictions. |
"There is a SIX am?" -- Arthur |
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Alfa
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https://finance.yahoo.com/news/6-billion-windfall-mexicos-massive-152046331.html
Any ideas who was on the other side? |
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nikol
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| Total Posts: 1138 |
| Joined: Jun 2005 |
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Is it a good business?
"The hedge has shielded Mexico in every downturn over the last 20 years: it made $5.1 billion when prices crashed in 2009 during the global financial crisis, and it received $6.4 billion in 2015 and another $2.7 billion in 2016 after Saudi Arabia waged a price war.
Hedge Cost
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The operation comes at a cost. In recent years, the nation has spent about $1 billion annually buying the options"
5.1+6.4+2.7-20*1 = -5.8
Does not payoff.
Or i m missing something and do not get a pleasure of paying for being in the circles of high intellectuals. |
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