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Syed Shah usually buys and sells stocks and currencies through his Interactive Brokers account, but he couldn’t resist trying his hand at some oil trading on April 20, the day prices plunged below zero for the first time ever. The day trader, working from his house in a Toronto suburb, figured he couldn’t lose as he spent $2,400 snapping up crude at $3.30 a barrel, and then 50 cents. Then came what looked like the deal of a lifetime: buying 212 futures contracts on West Texas Intermediate for an astonishing penny each.

What he didn’t know was oil’s first trip into negative pricing had broken Interactive Brokers Group Inc. Its software couldn’t cope with that pesky minus sign, even though it was always technically possible — though this was an outlandish idea before the pandemic — for the crude market to go upside down. Crude was actually around negative $3.70 a barrel when Shah’s screen had it at 1 cent. Interactive Brokers never displayed a subzero price to him as oil kept diving to end the day at minus $37.63 a barrel.

At midnight, Shah got the devastating news: he owed Interactive Brokers $9 million. He’d started the day with $77,000 in his account.

“I was in shock,” the 30-year-old said in a phone interview. “I felt like everything was going to be taken from me, all my assets.”

To be clear, investors who were long those oil contracts had a brutal day, regardless of what brokerage they had their account in. What set Interactive Brokers apart, though, is that its customers were flying blind, unable to see that prices had turned negative, or in other cases locked into their investments and blocked from trading. Compounding the problem, and a big reason why Shah lost an unbelievable amount in a few hours, is that the negative numbers also blew up the model Interactive Brokers used to calculate the amount of margin — aka collateral — that customers needed to secure their accounts.

Thomas Peterffy, the chairman and founder of Interactive Brokers, says the journey into negative territory exposed bugs in the company’s software. “It’s a $113 million mistake on our part,” the 75-year-old billionaire said in an interview Wednesday. Since then, his firm revised its maximum loss estimate to $109.3 million. It’s been a moving target from the start; on April 21, Interactive Brokers figured it was down $88 million from the incident.

Customers will be made whole, Peterffy said. “We will rebate from our own funds to our customers who were locked in with a long position during the time the price was negative any losses they suffered below zero.”

That could help Shah. The day trader in Mississauga, Canada, bought his first five contracts for $3.30 each at 1:19 p.m. that historic Monday. Over the next 40 minutes or so he bought 21 more, the last for 50 cents. He tried to put an order in for a negative price, but the Interactive Brokers system rejected it, so he became more convinced that it wasn’t possible for oil to go below zero. At 2:11 p.m., he placed that dream-turned-nightmare trade at a penny.

It was only later that night that he saw on the news that oil had plunged to the never-before-seen price of negative $37.63 per barrel. What did that mean for the hundreds of contracts he’d bought? He frantically tried to contact support at the firm, but no one could help him. Then that late-night statement arrived with a loss so big it was expressed with an exponent.

The problem wasn’t confined to North America. Thousands of miles away, Interactive Brokers customer Manfred Koller ran into trouble similar to what Shah faced. Koller, who lives near Frankfurt and trades from his home computer on behalf of two friends, also didn’t realize oil prices could go negative.

He’d bought contracts for his friends on Interactive Brokers that day at $11 and between $4 and $5. Just after 2 p.m. New York time, his trading screen froze. “The price feed went black, there were no bids or offers anymore,” he said in an interview. Yet as far as he knew at this point, according to his Interactive Brokers account, he didn’t have anything to worry about as trading closed for the day.

Following the carnage, Interactive Brokers sent him notice that he owed $110,000. His friends were completely wiped out. “This is definitely not what you want to do, lose all your money in 20 minutes,” Koller said.

Besides locking up because of negative prices, a second issue concerned the amount of money Interactive Brokers required its customers to have on hand in order to trade. Known as margin, it’s a vital risk measure to ensure traders don’t lose more than they can afford. For the 212 oil contracts Shah bought for 1 cent each, the broker only required his account to have $30 of margin per contract. It was as if Interactive Brokers thought the potential loss of buying at one cent was one cent, rather than the almost unlimited downside that negative prices imply, he said.

“It seems like they didn’t know it could happen,” Shah said.

But it was known industrywide that CME Group Inc.’s benchmark oil contracts could go negative. Five days before the mayhem, the owner of the New York Mercantile Exchange, where the trading took place, sent a notice to all its clearing-member firms advising them that they could test their systems using negative prices. “Effective immediately, firms wishing to test such negative futures and/or strike prices in their systems may utilize CME’s ‘New Release’ testing environments” for crude oil, the exchange said.

Interactive Brokers got that notice, Peterffy said. But he says the firm needed more time to upgrade its trading platform.

“Five days, including the weekend, with the coronavirus going on and a complex system where we have to make many changes, was not a sufficient amount of time,” he said. “The idea we could have bugs is not, in my mind, a surprise.” He also acknowledged the error in the margin model Interactive Brokers used that day.

According to Peterffy, its customers were long 563 oil contracts on Nymex, as well as 2,448 related contracts listed at another company, Intercontinental Exchange Inc. Interactive Brokers foresees refunding $18,815 for the Nymex ones and $37,630 for ICE’s, according to a spokesman.

To give a sense of how far off the Interactive Brokers margin model was that day, similar trades to what Shah placed would have required $6,930 per trade in margin if he placed them at Intercontinental Exchange. That’s 231 times the $30 Interactive Brokers charged.

“I realized after the fact the margin for those contracts is very high and these trades should never have been processed,” he said. He didn’t sleep for three nights after getting the $9 million margin call, he said.

Peterffy accepted blame, but said there was little market liquidity after prices went negative, which could’ve prevented customers from exiting their trades anyway. He also laid responsibility on the exchanges and said the company had been in touch with the industry’s regulator, the U.S. Commodity Futures Trading Commission.

“We have called the CFTC and complained bitterly,” Peterffy said. “It appears the exchanges are going scot-free.”

Representatives of CME and Intercontinental Exchange declined to comment. A CFTC spokesman didn’t immediately return a request for comment.

The fallout for retail investors like Shah and Koller raises questions over whether they should’ve been allowed to take a position in oil contracts right before they expired, putting them in position to have to take possession of barrels of crude oil. Brokers have been grappling with how to shield clients, especially those with small accounts who are clearly incapable of taking physical delivery, since that day. Some, including INTL FCStone, have already blocked certain clients from touching the front-month oil futures contract.

Peterffy said there’s a problem with how exchanges design their contracts because the trading dries up as they near expiration. The May oil futures contract — the one that went negative — expired the day after the historic plunge, so most of the market had moved to trading the June contract, which expires May 19 and currently trades above $24 a barrel.

“That’s how it’s possible for these contracts to go absolutely crazy and close at a price that has no economic justification,” Peterffy said. “The issue is whose responsibility is this?”

By Matthew Leising, 8 May 2020

Just a few years ago the head of ExxonMobil had to appear before a Congressional committee to explain their billions of dollars in profits that some called “obscene.”

This week investors in ExxonMobil are asking why the company did not make any profit during the first quarter of 2020. Its $610 million loss is the first time that ExxonMobil reported a loss in more than 30 years.

ExxonMobil isn’t the only oil company reporting financial troubles. Actually, there are more losers than winners.

The United States Oil Fund, the largest crude exchange traded product, said recently it will sell all of its 30-day contracts to avoid a repeat of the heavy losses that occurred around the expiration of the May contract on April 20 when the price of oil bottomed out at -$37 per barrel.

Crude oil inventories continue to rise indicating the oversupply is still expanding. The Energy Information Administration reported on Wednesday inventories increased by 4.6 million barrels from 527 million barrels to 532 million barrels. It is the 14th consecutive week that inventories increased.

Oil prices on the New York Mercantile Exchange for June delivery increased early in the week to $25 but declined to $23 after inventory figures were announced. Posted price for lease sales in Texas varied from $21 in North and West Central to $14 in South Texas, according to the Texas Alliance of Energy Producers web page.

The S&P Dow Jones Indices announced last week it would “pre-roll” all June West Texas Intermediate contracts to July for all of its commodity indices given the risk of June falling to or below zero given limited storage capacity.

Even though many U.S. oil producers intend to cut their production, it takes time to work out the details. Which wells will be cut back? Can they be shut down entirely? What’s the cost? Will there be damage to the well? What problems could be encountered restarting production? What about contracts with partners, royalty owners, drilling contractors and other service providers?

The EIA reports that U.S. production has dropped since a high of 13.1 million barrels per day in February to 12.8 this week. ExxonMobil, Chevron and ConocoPhillips all say they will reduce production that will total about 1.2 million b/d this year.

Many companies that purchase crude oil at the lease from smaller independent producers have told their customers they will not purchase any oil after May 15 because storage facilities are near capacity and there is no place to store the oil.

Refinery run fell to 12.8 million b/d for the week ending April 24, which is 21 percent lower than the five-year average. Demand for gasoline and jet fuel dropped to a 30-year low and an oversupply exists. Retail gasoline prices across the U.S. averaged $1.789 per gallon last week, which is a decline of $1.108 from the same period in 2019 …

The U.S. rig count declined by 57 last week to 408. The rig count last year on May 1 was 990. The huge decline indicates that producers will have difficulty replacing reserves and production when prices rebound.

There is a light at the end of the tunnel, however. Economists expect demand for petroleum products will strengthen as economic activity increases following the easing to restrictions on travel and business activity.

Will ExxonMobil be able to survive? Time will tell. As the global economy rebounds so will the demand for petroleum products and the bottom line for oil producers in Texas and around the world.

Alex Mills, published May 9, 2020

LONDON — Global fuel oil demand may be holding up better than its jet fuel and gasoline peers, but with inland storage facilities at high levels it appears only a matter of time before the economics of floating storage in Europe start to make sense for the marine fuel, according to market sources.

Shipping’s importance to the world economy — 90% of global trade is seaborne — means it has been given exemptions to keep operating through the widespread global lockdowns. However, the coronavirus pandemic has not left fuel oil demand unscathed as dry bulk, cruise ships and the container market all suffer, with inland builds of stocks in Europe and stocks spilling over on to floating storage in Singapore.

Combined stocks of fuel oil in the Amsterdam-Rotterdam-Antwerp hub decreased nearly 12% to 1.357 million mt in the seven days to Wednesday, according to data from Insights Global, but this was after reaching a 21-month high the previous week.

“Storage is pretty full, and demand is dire,” a source said, adding that buyers are pushing back delivery dates for product. The source noted however that 0.5% sulfur fuel oil demand is “a little healthier” compared to other fuel oil grades “as bunker volumes seem OK.”

“The fuel oil contango is not enough to incentivize floating storage; it works better for inland storage,” another source said. Other sources noted that the contango on 0.5% marine fuel works better than for high sulfur fuel oil, so it is being prioritized in the queue for storage.

Indeed, there appears to a global pecking order for storage related to the decimation of demand and the premium that can be commanded when they do sell, with crude, jet and gasoline all being moored offshore in considerable volumes. S&P Global Platts Analytics notes that all forward curves are all deeply in contango which is consistent with stock builds with jet, gasoline, and diesel, but the HSFO trend is similar albeit lagging.

Not all fuel oil is equal

Demand for 3.5% fuel oil after the International Maritime Organization’s stricter sulfur cap that came in to force January 1, 2020 has fallen off for the bunker pool as scrubber economics — using an exhaust cleaning system to allow vessels to continue burning high sulfur fuel — come in to question. One source noted however they were looking to store all fuel oil grades.

In the paper market, the time spread between 3.5% FOB Rotterdam barge front-month and month two was last assessed Thursday in a minus $12/mt contango, widening from minus $10.25/mt the day before.

The 0.5% FOB Rotterdam barges spread was assessed at minus $14.50/mt, steepening from minus $13.00/mt Wednesday and from minus $8.00/mt at the start of the month.

“0.5% marine fuel has a better contango, I am not surprised that more people are positioning themselves to store that,” one fuel oil source said.

Storage running out

As a result of limited storage capacity, European bunker premiums — the delivered market compared to the respective barge prices — have come under pressure recently, falling steadily since February. So far in April the premium has averaged $8.94/mt, down from a March average of $19.41/mt and off sharply from the February average of $26.24/mt.

One bunker source noted a decline in bunker premiums last week, particularly for Mediterranean marine gasoil, adding that this could be a result of needing to free up space for more product coming in.

The markets are keeping an eye on storage fundamentals, and not ruling floating storage out as it remains the only option after inland storage becomes saturated, which participants may be pushed to do so despite being uneconomic in the near future.

“Availability and prices of vessels will rally, so there will be less vessels and those that are left would be more expensive,” a source said.

“Some are starting to look at floating storage,” another source said, adding that they wouldn’t be surprised if some started to store on vessels.

Platts Analytics sees inland storage running out by June, with total storage afloat potentially increasing by 250 million barrels.

Fuel oil won’t have long to jump aboard those ships and the move to store fuel oil on the water in Europe may not be far away.

Editor Alisdair Bowles from Platts

DUBAI (Bloomberg) –The coronavirus that’s throttling fuel demand and forcing global producers to make unprecedented output cuts has left markets awash in so much crude that even the Middle East’s main oil-trading hub has run out of room to store unwanted barrels.

Terminal operators at Fujairah in the United Arab Emirates say they’re turning down requests from traders and refiners to store crude and refined products, whereas a year ago they had ample space. The port’s 14 million barrels of commercial crude-storage capacity is just a fraction of what Saudi Arabia and Abu Dhabi provide for their state oil companies.

Without tanks to lease, traders face costly constraints on their role as matchmakers who link a specific supply here with a willing buyer there. The global oil glut is making it harder for traders to even out imbalances in the market, and the plunge in crude, down about half this year, is making matters worse.

“If tanks are leased or blocked, then traders need to push back on taking crude,” said Edward Bell, senior director for market economics at Emirates NBD PJSC in Dubai. That, in turn, could force production in some places to halt, he said.

Demand for storage, an unglamorous but essential link in the global energy supply chain, is at its highest in years. From Singapore to Cushing, Oklahoma, tanks are brimming with crude, gasoline and other products, nowhere moreso than in Fujairah, a gateway for shipments from the world’s most prolific oil-producing region.

“The current capacity isn’t enough, for sure,” said Malek Azizeh, commercial director at Fujairah Oil Terminal FZC.

Even a deal between oil producers to trim global output by about a tenth won’t ease the storage crunch at Fujairah. The Organization of Petroleum Exporting Countries and partners such as Russia finally agreed on Sunday, after four days of deliberations, to cut production by 9.7 million barrels a day. Other nations, including the U.S. and Canada, expect to pump less because crude prices are too low for some of their oil companies to make a profit.

While a cut of this size would partly offset lost crude demand, it would fall short of OPEC’s own estimate for the drop in consumption. Trafigura Group sees oil use plunging by as much as 35 million barrels daily — roughly a third of normal global output — as countries prolong lockdowns over the coronavirus.

Fujairah, which hugs a ribbon of coastline between the craggy Hajjar Mountains and the Gulf of Oman, cemented its position in the world’s oil-storage and supply network over the last 30 years. It started out as a refueling station for tankers shunting crude from the Persian Gulf to refineries in China, the U.S. and elsewhere. It also built tanks where traders could stockpile fuels.

As state producers Saudi Aramco and Abu Dhabi National Oil Co. boosted refining capacity and started their own trading units, Fujairah’s storage operators benefited from the increasing volumes of crude and refined products flowing to and from the Gulf. Now that refineries are processing less crude and many of the world’s vehicles and aircraft are at a standstill, those regional flows have dwindled.

Stockpiles of fuel oil and other heavy distillates at Fujairah swelled more than 30% in the past year to 15.4 million barrels, according to the Fujairah Oil Industry Zone, which oversees the city’s terminals. Local authorities don’t provide inventory data for crude oil.

Two projects to add more than 62 million barrels of storage won’t be built until next year at the earliest.

“We are going to run out of storage because the demand declines are so steep,” Amrita Sen, chief oil analyst at Energy Aspects, said in a Bloomberg Television interview.

By ANTHONY DI PAOLA AND VERITY RATCLIFFE on April 13, 2020

Photo by Kevin Harris on Unsplash

The take-up of tankers hired for both clean and dirty floating storage is yet to reach the levels forecast last month, when the size and scale of the crude demand collapse stoked fears that land-based storage was strained and the crude price plunged to 18-year lows

Short-term time charter deals are unlikely to immediately materialise this week as everyone in the oil industry waits to see whether production will be curbed to let prices rise again

GLENCORE and Trafigura are leading global oil traders chartering long range two tankers for storage of refined products amid an accelerating global surplus of gasoline, jet fuel, and diesel.

But further short-term time charter deals are unlikely to immediately materialise this week, after the world’s key oil producers led by Russia, Saudi Arabia and the US signalled a possible agreement to curb global crude production by as much as 15%.

ST Shipping, the transport entity for Glencore, chartered two tankers for between 120 days and 180 days’ storage last week, according to reports from shipbrokers. Royal Dutch Shell and Litasco — Lukoil’s marketing arm — were also identified as each chartering an aframax-sized ship for periods of three to six months over the past seven days.

The take-up of tankers hired for both clean and dirty floating storage is yet to reach the levels forecast last month, when the size and scale of the crude demand collapse stoked fears that land-based storage was strained and the crude price plunged to 18-year lows.

“All time-charter deals of storage and contango plays either failed or are being scrutinised very carefully,” London shipbroker Braemar ACM said in its weekly emailed report.

“It is not all doom and gloom, despite oil cuts in production signalling less tanker demand. The oil will have to go somewhere, global storage tanks are filling up and refiners are reportedly turning away additional barrels as demand for refined products from petrol to jet fuel takes a hit.”

With any decision on a production cut between the key countries now postponed until Friday, further deals await clarification on whether oil producers will agree to curb record output.

Some 130.9m barrels of crude is currently tracked in short-term storage of 20 days or less on 93 tankers, according to data from Lloyd’s List Intelligence. That’s close to the record of 131.6m barrels tracked two weeks ago.

However, the figure is inflated by Iran’s national tanker fleet, National Iranian Tanker Co, which cannot trade due to US sanctions and is storing crude and condensate on its tanker fleet, which includes 36 very large crude carriers.

Middle distillate markets are broadly in contango, when the future price is higher than the spot price, with traders able to buy now and take a futures position for sale at a profit, while placing the physical cargo in storage. Jet fuel and gasoline have plunged in price as demand for air and land transportation has collapsed, with onshore inventories quickly rising.

“If you are able to find free tank capacity now you can make a fortune,” said Insight Global, in an April 2 report into the onshore tank industry. Commercial tank capacity at the Amsterdam-Rotterdam-Antwerp, US Gulf coast, Fujairah and Singapore hubs was around 75%, the Netherlands-based petroleum research company said. It would take almost four months for tanks to “reach tops”, assuming a 10m bpd drop in demand, according to the report.

LR2 rates have soared on the benchmark route to Japan, amid floating storage speculation. Earnings to ship 90,000-tonne cargoes of refined products from the Middle East Gulf. To Asia are equivalent to $65,500 daily according to the Baltic Exchange. This rate was at $4,000 daily in late January, before coronavirus was declared a pandemic.

Average rates gained 20% for larger product tankers over the week ending April 3, with increases of 5% seen for smaller, medium range tankers, which dominate the sector.

Of the 25 aframax period charters reported for 12 months or less over the past two weeks by oil traders, three directly reference the fact that they will be used for floating storage. A further 11 vessels were hired for periods ranging from 30 to 60 days, or up to 180 days, suggesting they could also be used by this purpose.

Rates to take aframax tankers for short-term periods were reported as high as $45,000 and $50,000 daily. Litaso chartered the LR2 Elka Athina for 150 to 180 days floating storage, while Shell’s shipping arm paid $50,000 to charter the Fos Athens for 60 to 120 days, and $52,000 daily to extend that to 180 days after the first four months.

From Michelle Bockmann published April 6, 2020