Giving away oil

Tuesday oil producers had to pay other parties to take their oil off their hands.  Well, not exactly.  What did happen is the price for May delivery of West Texas crude fell to -$38 per barrel.

So what gives?  Keep in mind these are futures contracts that are used for risk management; these are options to sell.  Oil companies purchase these futures to hedge against the risk of price drops.  For instance if the price of oil today was $30 per barrel and you were worried about the price dropping below $25, you might want to buy an option that lets you sell at a price of $28.  Most options are never exercised; they either expire or are traded.

On Tuesday there were not any buyers for May delivery at prices above zero.  This is happening because (1) global demand for oil has collapsed as people shelter at home to avoid COVID-19, (2) major producers such as Russia and Saudi Arabia have yet to cut back on production despite the demand situation, (3) it is costly to shut down a well so many producers have procrastinated, and (4) we are about to run out of storage space.

In a nutshell, a simple supply and demand story.  Looking ahead, expect prices at the pump to drop in the coming weeks, perhaps falling below $1 per gallon.  For more insight, see this video clip of my interview with local news channel WRAL.

Maybe you should stock up on toilet paper

Shortages of certain goods were easy to anticipate as a result of COVID 19, including hand sanitizer and disinfecting wipes.  An early run on "critical" household supplies is also no surprise; in North Carolina eggs, bread, orange juice and milk vanish from the shelves whenever the local weatherman hints at snow or ice.  

But toilet paper?  Initially many experts assured us that this was a simple inventory management issue and that more product would be rolling out soon.  Now I am less sure, for two reasons brought up in this WP article.  

First, people are spending less time away from home working, traveling, or socializing.  This means a shift in demand from using other people's paper to using your own.  Second, TP away from home is not a perfect substitute for TP at home.  Think about it -- the rolls at work, restaurants and airports are often a foot in diameter.  Even more critical, they are usually single ply.  In other words, there is a mismatch in the specs of much of the TP being produced and the specs of what people want to buy for home use.  

In time I am sure that the makers of Charmin and Cottonelle will figure out how to expand capacity.  But the makers of away-from-home TP will need some time to reconfigure their production lines and distribution channels so that they can sell directly to consumers.  This may take almost as long as it is taking GM and Ford to switch from cars to ventilators.  

This same phenomenon is happening in food production.  Companies that make ten pound bags of shredded mozzarella for Sysco are not going to be able to turn on a dime to make smaller bags for consumers.  

My advice: don't wait until you are down to your last roll before restocking.