The sensational TV coverage regarding the “Negative price of oil” is a classic example of the kind of “clickbait” that runs rampant in the financial news. Today’s volatility in the financial and commodity markets is really no different than the kind of movement we have seen since the beginning of the Coronavirus pandemic, but unfortunately the status quo doesn’t sell advertising.
The markets have been an emotional wreck since early March, and the media feeding frenzy is probably as much to blame as Covid-19. Late in today’s market session, a popular financial channel featured a guest “expert” who outlined a doom and gloom scenario for oil prices because the May futures contract for crude oil had turned negative. His bearish take whipped the host into a panic not unlike another famous meltdown on CNBC last month that caused a near 2,000 point rout.
On March 27th, 2020, a well known activist investor melted down on national TV, stating that America could “end as we know it” and that Hilton and every other hotel stock was “going to zero”. The stock market dropped like a rock. A few days later, in their first quarter regulatory filing, his company disclosed that they had made over $2 billion as a result of being “short” and profiting from the market decline! Are you angry yet?
In both instances, the media outlet focused on the hype, not the facts, and a look at the facts reveals just how irresponsible today’s reporting actually was. So here is the reality:
– West Texas Intermediate Crude, or WTI, is a measure of the price of a barrel of oil at a single Oklahoma storage facility. The futures contract that showed a negative value was the May futures contract that expires tomorrow. Since the storage facility was at capacity, there was no demand for the May delivery under the futures contract, so essentially the facility had to “pay” to avoid delivery of oil that they couldn’t store. The futures contract really had nothing to do with the price of oil, but instead was a measure of the fact that there was no interest in that particular delivery month! To add perspective, the futures contract for delivery in June was trading at $21.04 at the same moment, and the July delivery contract was trading at $29!
– Many of the “expert” commentators featured on the financial news channels are actually CEO’s of hedge funds, who make money on both sides of the market. In other words, they make money by owning stocks or commodities and they also make money by selling things they don’t own (selling short) and buying them back after the price goes down. It doesn’t take a psychic to know which side of the oil market today’s “expert” is on!
-Hedge funds in the US are largely unregulated, and creating this type of self fulfilling prophesy is something that these people have been doing for a long time. They sell short and then create a narrative that causes prices to fall, allowing them to “cover” their shorts at lower prices. It is simply a transaction in reverse. While doing so is certainly their prerogative, I will argue that it is irresponsible for the financial media to provide a forum for their activities.
I have long felt that the financial media sells the “hype” and ignores the rules of responsible reporting in favor of the creation of emotion and headlines regardless of who pays the price. The “activist investor” story and today’s nonsense only prove my point. Your granddaddy was right- you can’t believe everything you hear!