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Non-Tech : Derivatives: Darth Vader's Revenge

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From: The Ox4/22/2020 7:47:06 AM
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Negative Oil Prices, From the Folks Who Brought You the Financial Crisis

The financial world has been turned upside down by extraordinary events in recent years. First there were negative interest rates, something that had never happened in 5,000 years of recorded history. Now it’s negative oil prices , a phenomenon that sparked headlines Monday far beyond financial news.

There are important differences between the two, however. Negative interest rates were imposed by central banks in Europe and Japan as part of their conduct of monetary policy. Oil, by contrast, trades in a relatively free market that, once again, is proving to be resistant to control by government-run cartels.

Perhaps more significantly, the spectacle of oil prices falling below zero also demonstrates the outsize impact that various derivative financial products can play in setting the price in markets. And it further serves as a reminder of the observation of the late Paul Volcker —the former Federal Reserve chairman and the greatest central banker of our time—that he saw just one financial innovation of true economic value: the automated teller machine.

The U.S. benchmark crude for May delivery fell Monday to a settlement price of minus $37.63 per barrel. The reason that sellers would pay buyers to take oil off their hands is that there was literally no place to store it. <snip>
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