Part 2 - Could we see negative prices for Vitamin E50?
May 04, 2020
Author: Guy Soreq
After fielding several questions from Glowlit users regarding last week’s newsletter, we decided to scrap the planned topic for this week and return for Part 2.
Last week (https://glowlit.com/blog/could-we-see), we wrote about the marked moment when US crude futures turned negative for the first time in history. In what could only be described as a perfect storm the world witnessed a crash in global demand brought on by COVID-19 as the Russians and Saudis waged an oil war leading to further oversupply.
What happened next is the most critical part of our story - amid the massive oversupply, oil storage space vanished completely. Many traders holding futures contracts discovered the lack of storage availability too late and were forced to sell their contracts at a loss to keep them from turning into a liability of actual oil.
So this prompted us to ask the question that got readers both excited and a bit nervous: could we see negative prices for Vitamin E50? Our answer then and now remains - probably not. We don’t foresee negative prices heading toward the animal feed industry, but there is another lesson here worth examining.
While oil and feed have little to do with each other in the way of price dynamics, it turns out that the market for oil storage actually behaves in much the same manner as animal feed. Oil storage is an opaque relationship-based market filled with brokers and suppliers. Knowing where there is availability and how much requires picking up the phone and asking.
So what do oil and Vitamin E50 have in common? Information delays have led to massive market volatility for both. In the case of oil, it was enough to briefly take the price negative. In the case of Vitamin E50, volatility presents somewhat differently - we see that the same volume can fetch wildly different prices within a short time span.
When information isn’t evenly and instantly shared across the supply chain, we get market inefficiencies which result in overall declines in productivity. For the animal feed industry, this is a fate far more destructive than a momentary dip into negative prices.
Picture Credit- Dado Ruvic (Rueters)