The spot prices of oil dropped to $0.01 on Monday, as it inks a historic day in trading. It occurred on the last day of the futures contract expiration for the month of April. Nevertheless, there was a lot of discrepancy between the spot price and the futures price as it went as low as $-38.
The drastic changes in price on a single day had more to do with speculators, than actual traders of oil. It had much to with a concept called ‘roll yield in a contango,’ where the futures traders rolled their position to the next month, as taking delivery of the barrels is not feasible.
Hence, while having had to sell their contracts, they began covering the huge difference in spot and futures prices, which began the historic fall of abnormal proportions. Ari Paul, the Managing Partner at Blocktower Capital notes,
…this is about supply and demand for the *May future* which was driven far from its brothers by quirks having nothing to do with supply or demand for oil.
Moreover, the markets are still in contango for the June and July contracts.
Why Bitcoin might be Different?
Peter Schiff, the CEO of Europac and a gold buff explains how the exact opposite can occur when the long bets are placed. Primarily, oil fell as short traders were settling their contracts or selling at the latest low prices, but there is no demand for the long contracts since delivery is not possible. He said,
In oil the shorts are trying to deliver, but the longs don’t want it. In gold the longs will try to take delivery, but the shorts won’t have it!
Bitcoin [BTC] can expect a similar trend, and that is what we saw in 2019 when short squeezes and spot interest drove the markets to a 250% gain.
Moreover, since with Bitcoin, the delivery or spot exchange of Bitcoin is rather easier than oil, or even gold, buyers can be expected to arrive much quicker on spot markets. This is what evidently occurred during the March 12-13 crash, when the ‘cascading liquidations’ were driving to prices to lows, but the price at spot exchange like Coinbase began to rise.
Of course, liquidity in the crypto markets and interest in spot buying must be there to cushion the drop. Furthermore, their producers or the miners, will never face the problem of inventory cost or forced to sell at negative prices. Nevertheless, as for gold, even with the lowest of values, it can be melted to form jewellery, while Bitcoin can only be stored in a pen drive.
How do you think the oil crash is affecting other business and market psychology? Please share your views with us.