The Day Oil Was Worth Less Than Nothing

What is a commodity?

You'd never buy a second-hand bike without looking at it first. You'd check the frame, squeeze the brakes, ride it around the car park.

But every single day, people buy a hundred tonnes of wheat without looking at it once. They buy oil they will never see, from a seller they will never meet. And nobody thinks that's reckless. Why not?

Because with wheat, there's nothing to look at. There's no wheat with a scratch on it. There's no wheat that used to belong to somebody famous. You say the grade, you say the amount — and that's the whole description. There's nothing left to check.

That's what makes something a commodity. It's raw material where one lot of it is exactly as good as any other lot. Which is also why it can have one price for the entire planet. Once there's nothing to argue about except how much of it there is, everyone can trade the same thing at the same number.

Why would anyone buy commodities?

Fair question. You can't eat a stock — but you also can't do much with a hundred tonnes of wheat. Two real reasons to own them.

Diversification. Your stocks all move together way more than you'd like. When the market gets scared, it doesn't get scared about one company — everything drops at the same time. But wheat doesn't care what happened on the stock market on Tuesday. Wheat cares about rain. So if you own some, not everything you have is riding on the same thing.

Inflation. Inflation means stuff gets more expensive. And commodities are stuff. So when everything is getting pricier, the raw material is usually getting pricier too. Money sitting in your bank account quietly loses value. A tonne of copper doesn't.

Both of those are tendencies, not guarantees. Gold — the famous one, the one everyone calls the inflation hedge — has had twenty-year stretches where it lost value while prices were going up. It often works. It doesn't always work. Anyone who tells you otherwise is selling you something.

Four ways to actually invest

There are four ways in. Realistically, two of them apply to you.

Physical gold and silver: bars are the cheap way — you're paying for metal and nothing else. Coins cost more because people collect them. The problem is everything around it: storage, insurance, and selling takes days, not seconds.

Futures were invented for farmers — the farmer has wheat growing in May, a bakery needs it in September, neither knows what it'll cost by then, so they agree on a price now. These days almost nobody trading futures wants the actual wheat. Remember this one. It comes back in a minute.

Funds let you buy in easily with no storage or insurance headaches. Just check what's actually inside — two funds with almost the same name can hold completely different things. One might have real gold in a vault. The other might just hold contracts.

Companies are the easiest — it's just a normal share. But a gold mining company is not gold. You're also buying that company's debt, its management, its strikes, and the politics of whatever country the mine happens to be in.

The trap — and why being right isn't enough

This is the part that actually matters. Say you've got €100 and you want to bet on oil. The June contract costs €25, so you buy four of them. June comes around — you obviously don't want a truck of crude oil turning up at your house — so you sell. Oil hasn't moved, so you get your €100 back. Fine.

But you still want to be in oil, so you buy the next one — September. And September costs €30. Your €100 now gets you three and a bit contracts.

The price of oil did not move. You did not do anything wrong. And you went from four units of oil to three and a bit. Around 17% gone, just from swapping one contract for another.

Why is September more expensive? Storage. If somebody's promising you oil in September, they have to keep it in a tank until then, insure it, guard it, and their money is stuck in it the whole time. They charge you for that. And a fund that holds contracts does this swap every single month. Forever.

Back to minus thirty-seven dollars

April 2020. Covid. The world stopped driving and stopped flying, so nobody wanted oil. But you can't switch an oil field off like a light. The stuff kept coming out of the ground with nowhere to go, and the tanks started filling up.

Now think about who was holding those futures contracts. Traders — people who never wanted a single drop of oil. They just wanted the price to go up. But a futures contract isn't a bet you can walk away from. It's a promise to actually take delivery. And suddenly there was nowhere left to put it.

So they paid people to take it off their hands. That's how you end up at minus thirty-seven dollars. Commodities feel like the simplest thing you could ever invest in — it's real stuff, no accounting tricks, no complicated company, just oil. But real stuff has to go somewhere. And that one fact is behind every strange thing in this market.