On April 20, the West Texas Intermediate (WTI) crude oil futures for May delivery fell 305 percent to -$36.73 a barrel in the NY session.
It was a bloodbath. A hint of how market forces of supply and demand shape prices.
For once, traders and the investment community pinned this to the effects of coronavirus and the negative effects of lockdowns across several states and some parts of the world.
Truth is, it has been devastating.
The economy, analysts project, could take years before it bounces back to pre-coronavirus levels.
This would also have serious ramifications on employment, living standards, and the well-being of the worker. Most of whom have been told to work from home, told to accept lower pay, and sometimes lose jobs.
The cost of obligation?
However, yesterday’s plunge in oil prices reveals how cautious traders are. Their risk averseness is based on foresight that despite the government’s optimism, it will take a while for industries and the economy to bounce back. The lower this gloom lingers, the lower the demand will be.
Meanwhile, the drop in demand, despite the truce by OPEC members to lower daily production, won’t prevent millions of barrels of oil from flooding storage facilities. In essence, the statement from the market yesterday was that oil storing facilities will offload oil to whoever as long as there are extra storage facilities at a steep discount.
This ruffled the market and the price a contract to take delivery of oil from a certain source at a certain time crashed revealing fear. To make it clear, the price of oil at gas pumps wasn’t affected per se.
But, the supply glut will likely drive down the cost of gas and other petroleum products in the immediate term. Understandably, no one wants to hold a contract that they can reneg come mid-May or end up paying huge bills because of lack of storage facilities.
“Oil has a storage cost. Speculators don’t want to receive physical barrels of oil. To avoid taking delivery they must sell the future before expiry. Global pandemic has sent oil demand to zero. Oil price war has sent supply to infinity. Bitcoin has no storage cost.”
Oil has a storage cost.
Speculators don't want to receive physical barrels of oil.
To avoid taking delivery they must sell the future before expiry.
Global pandemic has sent oil demand to zero.
Oil price war has sent supply to infinity. #bitcoin has no storage cost https://t.co/U4QAq7CAds
— James Viggiano (@jamesviggy) April 20, 2020
Bitcoin has no Storage cost like Oil, Is a perfect Store of value
The conundrum in the Oil Futures market has caused experts to turn to crypto, fiat, and Gold.
Gold has for a long time held the crown as a store of value while the USD is also contending as an alternative especially during times of crisis.
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).
— Cameron Winklevoss (@winklevoss) April 20, 2020
Their downside is that central bank intervention with USD and the probability of infinite supply in gold shines the bright lights on Bitcoin.
Bitcoin is controlled by mathematics and there is a known fixed supply. Besides, its utility doesn’t depend on consumption.
In reality, the fall in the oil futures price truly exemplifies what can happen to an asset, oil, whose demand is based on consumption which in turn is influenced by other external factors.
We can blame Coronavirus for this but the distribution and decentralization of Bitcoin has so far countered its effect.
“The recent oil price crash exemplifies what can happen when something used as a store of value relies on either consumption of that good or the fashionability of that good as a major basis of its value. Art, wine, gold, silver and #oil share this characteristic. Not Bitcoin”
The recent oil price crash exemplifies what can happen when something used as a store of value relies on either consumption of that good or the fashionability of that good as a major basis of its value. Art, wine, gold, silver and #oil share this characteristic. Not #Bitcoin.
— Bob Burnett (@boomer_btc) April 20, 2020
At the time of press, Bitcoin is changing hands at $6,815, down four percent in the last trading day.