In an unprecedented move yesterday, U.S. crude oil futures plunged well into the negative territory. An oversupply during a period of record-low demand has seen oil prices tank around the world.
Some have brought into question oil’s position as a store of value in the wake of such dramatic moves. If oil ever really was considered a store of value, recent storage issues point to considerable shortcomings during potential crises.
Oil: If No One’s Using It and No One Can Store It, No One Wants to Buy It…
As BeInCrypto reported, crude oil futures took a battering yesterday. The most dramatic moves were seen in the West Texas Intermediate’s (WTI) derivatives markets. Prices briefly plunged to almost -$40.
The extreme price action comes as the world has been forced to dramatically cut its crude oil consumption. With global industrial output at only a fraction of levels typically observed, oil reserves have been building up.
The world’s oil tankers, chartered to store the surplus, are now close to capacity. For many traders, the commodity has become an overnight hindrance. As such, the price at futures exchanges could only head south. [The Guardian]
“After today, oil can no longer be considered a reliable store of value. Your next best options are the U.S. dollar (gulp), gold (scarce), or Bitcoin (fixed).”
There are some rather large issues with the idea that oil could be used as a reliable store of value. Chief of these is that supply can outstrip demand so suddenly that the price can plunge into negative territory in just a matter of hours.
Over the course of the ongoing coronavirus crisis, oil futures prices have taken a real beating as demand progressively dried up. After opening the year at more than $60 per barrel, a clear downtrend that accelerated into a rapid crash saw traders actually paying for the disposal of the surplus, yesterday.
A Store of Value Is No Good If You Can’t Store It
The main issue in the oil market is that someone needs to actually take delivery of the oil. Whereas even a few kilograms of gold takes up relatively little space and Bitcoin requires no physical storage, oil is inexpensive and cumbersome.
A single barrel, which has recently traded anywhere between -$40 and +$60, is more than 150 litres. To store any serious value in the asset, you would need colossal storage facilities.
This is an issue at the best of times. However, when faced with a huge drop in demand, oil producers scrambling to reduce supply, and traders renting tankers, the commodity becomes even more difficult to actually store.
Recent events show that oil’s price is hugely dependent on its constant industrial use. During a crisis like that of the coronavirus, this can suddenly fail. Oil’s price will surely return as efforts to reduce mining catch up with the surplus and industry eventually returns to normal. However, those that had held the commodity within their portfolio will surely be forced to reconsider how stable their allocation is against future crises.