*This was originally posted in two parts in my Telegram channel: March 9, 2020 (when oil was $35) and April 20, 2020 (when oil hit -$40). I’ve combined them here into one story about watching the oil market implode in real-time. Text is auto-translated by Claude Opus

Part One: Where coronavirus wreaks havoc

[March 9, 2020]

Narrator Note from 2025: while it was the consensus hypothesis at the time, I would like to not specualte on what was the actual COVID-19 origin, but for the literary reasons we will stick to the biological origin

The main character of 2020 so far has been a suddenly mutated coronavirus. As usual, it all started with one bat. China has a massive wild animal trade market. There are historical reasons for this, but that’s not important right now. What matters is the market exists and it’s huge. Wild animals are sold at special markets, and they’re kept alive there.

China doesn’t have much space, so animals sit in cages stacked on top of each other. It’s basically paradise for infections and viruses, which happily hop from one animal to another along with various bodily fluids. Different animal species typically have different disease susceptibility - what’s fine for a badger might kill a human.

So it happened that an infection from a pangolin (it’s like a lizard-armadillo hybrid, look it up) transmitted to a bat, mutated there, and went public. The mutation turned out to be dangerous for humans. Don’t worry, they’ve shut down these wildlife markets, but who knows with China - they might reopen soon. The animal trader lobby is strong, and their interests might outweigh those of 7 billion people on the planet.

We got what we got. Everyone’s afraid of the infection, the world is in chaos and uncertainty. The first thing that happens during any uncertainty is the dollar strengthening. The dollar happens to be a pretty stable currency. In Russia, a Kinder Surprise used to cost 30 rubles, now it’s 77. In the US, it costs what it always cost - stability.

There’s this confidence that everything in the US works great, and one person can’t tank the national currency - even the boss of chaos-creating Donald Trump couldn’t do it. The ruble started falling against the dollar, money smoothly flowing to finance healthcare for all Americans. It’s a reputational thing.

But there are bigger problems. Since most coronavirus cases are in China, they had to quarantine lots of people. Which means factories are idle! No one to work, everyone’s at home. Production volumes dropped. Not sure if you knew, but the entire modern world is made from oil. I didn’t get it as a kid - why is oil so valuable? I thought oil only made gasoline, and how much money can you make on gas? But no, oil makes basically everything in this world, plus plastic. So demand restriction is a huge problem for the oil market.

Part Two: Where Igor Sechin shows the Americans who’s boss

Oil prices are regulated in a completely insane way. There’s OPEC - a cartel controlling oil supply (and therefore price). It includes various Middle Eastern and African countries, plus Venezuela and Ecuador. The latter are already familiar with cartels thanks to Pablo Escobar, while the former founded this one. Legally, OPEC doesn’t control all oil output - the US and Russia aren’t members and technically don’t owe anyone anything. But they usually show up to participate in planning output for the next six months. Sometimes it helps, and being in the cartel is definitely nicer than being outside it.

Late last year, Russia agreed with OPEC to regulate output until April 2020, targeting oil prices around $60/barrel. This price works for everyone, more or less. On Friday before March 8th, the oil men gathered to decide what to do with the agreement after March. Obviously coronavirus wasn’t going away quickly, meaning demand would drop further, meaning they’d need to cut supply to maintain that $60/barrel target. All logical.

But Igor Sechin, head of Rosneft, Putin’s friend, and just a wealthy guy representing Russia at these OPEC negotiations, decided this deal was too good for the US. They have high production costs - if oil drops to $40, it becomes economically unsustainable for the US to produce oil, and “we’ll show these Americans who’s really in charge”. Long story short, they couldn’t reach an agreement, which meant nobody would regulate supply anymore. Prices were free and the market would finally decide.

Part Three: Where we explain Igor Sechin’s math

Let’s break down Sechin’s logic about oil production profitability across countries. Recently a major Saudi oil company was planning an IPO (they did, sort of) and prepared a massive 658-page report on oil markets in different countries.

First, Sechin is right that $40 oil isn’t profitable for the US. Shale oil (the trendy way to extract oil) costs about $49/barrel to produce. Russian oil production costs were estimated by Saudi specialists at $42-44/barrel. This figure is probably inflated - they obviously wanted to make themselves look better. Saudi Arabia’s production costs range from $10-17/barrel depending on location. But that’s probably lowballed, let’s say it’s around $20.

Now let’s think back to microeconomics lessons. At $50/barrel oil, everyone’s doing okay: the US barely breaks even, Russia makes $10/barrel profit, and Saudi Arabia makes $40/barrel. This was the proposed option.

At $40/barrel, Russia breaks even, the US stops producing because it’s unprofitable, Saudi Arabia still makes $20/barrel, and everyone except the US is happy. This was Igor Sechin’s option.

But there’s a third option. Saudi Arabia clearly has huge leverage in oil price negotiations because they can keep producing at very low prices. They’re fine even at $20/barrel. Then nobody except them and a few other Middle Eastern countries can profitably produce, meaning they capture all market demand. This is called market economics - how it should work without OPEC.

Part Four: Where the market decides

The OPEC deal collapsed, Igor Sechin decided Russia would rather lose margin than let Americans get anything! That’s when Saudi Arabia entered the game. They basically said: fine, if you don’t want to negotiate, let’s try playing market economics. And started producing A LOT. Why not? Oil prices for May delivery instantly dropped to $35. Now Russia was struggling to profit from oil production and sales.

The Russian oil cost question is actually complex because most of the cost is taxes. Since that seems like a controllable variable, especially in today’s Russia, Russia could theoretically withstand $35/barrel prices. Though there wouldn’t be much money left - nothing to develop new fields or extraction methods.

Part Five: Where the dollar rises 5 rubles overnight

Everyone was shocked by both Sechin’s and Saudi Arabia’s actions, but it became clear Russia would struggle to profit from oil. The ruble’s investment attractiveness dropped accordingly, meaning time to sell rubles and buy something more reliable - like dollars. Ironically, the US wouldn’t profit from oil either, but they have other ways to make money. Result: 2 ruble drop per dollar.

Then fever and panic hit. At 1 AM Moscow time, global exchanges open (nobody respects women except Russians, so no March 9th holiday), and the ruble starts trading. Everything goes to hell. People see the ruble losing value and rush to sell all their ruble holdings to save something. This causes an even bigger ruble crash.

By 11 AM, the dollar hit 75 rubles. It bounced back a bit as people calmed down. By my calculations, the worst would come tomorrow when Russia returns from holidays and the Central Bank updates the ruble-dollar exchange rate. This could add more panic and crash the rate further. Or maybe not. Nobody knows - that’s the problem. People are somewhat confident in the dollar.

Part Six: How to live

It’s probably too late to sell rubles and buy dollars or euros. I won’t convert my euros to rubles yet, but I’m not selling rubles for dollars either. There’s huge uncertainty ahead and the situation could go either way. Exchange rate spreads are huge - the difference between buying and selling dollars reaches 3 rubles. Any careless moves could lose even more money.

Oil prices might drop further if Russia and OPEC don’t reach a deal - meaning gas prices will rise. Time to walk more!

Flying abroad might get even more expensive, but who cares when Anapa is just like Vietnam, you can see mountains at Rosa Khutor, and Moscow can replace everything else.

Wash your hands more often, don’t touch your beautiful face with those same hands, be happy, love each other, stay home, and stay healthy. Hugs to everyone.

[Time passes. Oil keeps falling. Then, 42 days later…]

Part Seven: Holy Shit, Oil is Negative Money

[April 20, 2020]

My evening was brightened by WTI oil prices (that’s American producers, WT is West Texas) which managed to plunged from $18 to -$40 in a day (really, currently the barrel costs MINUS forty dollars, might go even lower by end of day, we’ll see). Anticipating the main question: “is this the end?” Nah, it’s fine. Here’s the deal…

Oil prices balance on supply and demand. And it just so happens that with recent events, demand for oil has fallen. Actually, it’s zero. Nobody needs oil anymore. Factories are idle. But oil companies, even though they limited output, didn’t stop completely. There’s so much oil on the market, nobody’s taking it, and the amount keeps growing.

So we get this interesting situation: since there’s nowhere to dump the oil, absolutely all available oil storage is full. All barrels, all tankers, all buckets - everything’s full. Nowhere left to put it! You’d think they could just stop, but that might be even more expensive than selling at a loss. Because stopping production means figuring out what to do with your workers, then spending money to restart production, plus right now companies are pumping from underground hoping they’ll eventually sell.

Now, a note on oil distribution. It usually happens through futures, and that’s the price everyone watches. A future is a paper parameterized by three things: what we’re selling, when we’re delivering, and for how much. An oil company sells a contract to deliver their oil in June for X dollars. Some factory buys this contract. The oil company and factory agreed to deliver oil on time at the agreed price. You can break the contract unilaterally by paying a fine, or resell it to someone. Important: the closer the delivery date - the expiration date for the future - the closer the price gets to current market price, because either side can break the contract, pay the fine, and sell the oil that same second.

And here comes D-Day. Today’s the last day to execute May oil futures. Today you have to deliver. Oil companies never found buyers. But there’s no space left either. So it’s cheaper to just dump the oil at any price because there’s nowhere to store it. And yes, the oil company is willing to PAY someone to take their oil right now because storage has become too expensive. Insane world.

Now for the good news. The market thinks this situation won’t last long. Current WTI price for May is -$40, June is $21, and September is already over $30. Basically, the main thing is someone takes it now, and factories will sort it out later. So if anyone has a spare 160-liter barrel at their dacha, there’s a scheme to easily make 40 bucks and get free oil as a gift. Might come in handy for school. Or you can flex on your friends that you’re now an oil tycoon. Weird flex but ok.

By the way, Brent futures (another trendy oil grade) expire April 30, same with Urals (that’s Russian). Let’s wait, looks like we’ll get the same circus with prices if they don’t figure out where to store it.