Can Crude Really Trade At Negative Prices? Yesterday It Did

May Crude Oil WTI Futures traded down to -$40.32!h3 Background/h3

A futures contract is a legal agreement to buy or sell a particular commodity asset, or security at a predetermined price at a specified time in the future (Investopedia). Futures trade in monthly contracts, which expire a few days before the month begins. For example, May 2020 WTI Crude Futures expire today, April 21^st, 2020. However, if someone wants to hold an expiring futures contract longer, they must roll the contract forward to a future month, which is usually at a premium to the expiring month. This is typically done a week or so before the expiring contract so that there is still plenty of liquidity and to make sure there are no errors. Otherwise, one would have to take delivery of the product (for example, 1 Crude oil WTI contract equals 1,000 U.S. barrels).

There has already been a glut of oil in the market beginning with the economy slowdown caused by the coronavirus. This slowdown significantly decreased the demand side of the equation. In addition, in February Russia refused to cut back production with OPEC. Therefore, Saudi Arabia decided they would not cut back either, and turned the pumps on full throttle. Oil is being stored on barges out at sea right now because there is nowhere else to store it. This increased the supply side. When demand is greater than supply, the price goes up. When demand is less than the supply side, the price goes down.

May WTI opened the day at $17.73. Most futures contracts to be rolled to June have already been done, so liquidity in the May contract was already thin. As the day wore on, there were still those who needed to get out, however the price of the June contract was relatively stable between $22 and $23. Therefore, as the price of the May contract moved lower, the premium you had to pay to roll to the June contract became more expensive. This led to eventual capitulation of the holders of the remaining May contracts and the “get me out at any price” mentality, so they would not have to take delivery (add in any algos pushing lower as well).

Price traded to a low of -$40.32! This means that people who owned May WTI oil contracts were willing to pay someone $40.32 to take the oil from them or take delivery on the oil at expiration tomorrow. Price closed at -$37.11.

h2 What Happens Now?/h2

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The price of the June Crude Oil WTI contract is currently trading above $21.00. Owners of May Crude Oil WTI futures contracts will take delivery if they don’t get out today. OPEC++ has agreed to cut back production on May 1^st. There is already a supply glut. The key will be on the demand side. Traders who own the June contract believe that demand will pick up, to the point where enough Crude Oil will be needed so that it will be worth $21.00 a barrel. However, if demand does not pick up, or if oil producing countries don’t abide by the supply cut, then price could move lower and the same thing may happen at expiration to those who haven’t rolled to the July contract. There is still 1 day left in the May contract. As of writing it's bounced back, and owners of the May contract can get out at a positive price.

So, if you hear someone say that crude closed below $0.00, just remember that it was the illiquid May futures contract, and not the underlying spot market contract. However, if the global economy does not pick up soon, one day it may be the spot market price too.

Original Post

Written By: Joe Perry