"Any headline that ends in a question mark can be answered by the word no."
Perhaps true when this article first appeared, but FT reports US oil price below zero for first time in history.
These prices are for short-term future contracts, and I suppose a plain-language explanation is that some traders were willing to pay people who would promise to take some grades of surplus oil off their hands in the next few weeks.
Spot prices remain positive, but not by much.
- Not all oil contracts are trading in negative territory. Brent, the international benchmark, lost 8.9 per cent on Monday to fall to $25.57 a barrel, but is less immediately afflicted by storage issues.
Brent is a seaborne crude allowing traders to easily ship it to areas of higher demand. Amrita Sen at Energy Aspects said: “With Brent you can put it on ships and move it around the world immediately. Storage tanks at Cushing, however, will be full in May.”
WTI contracts for delivery in June lost 14.7 per cent but held above $20 a barrel, though traders warned it could face further losses. Both benchmarks traded above $65 a barrel as recently as January.
My second goofy oil vs. Big Macs wager, based on the Cushing, OK spot price, was looking bad for the first four years, and 2026 still seems far away.
This price action in the front month WTI futures contract was likely due to the USO ETF rolling their position. |USO owned 25% of the outstanding volume of May WTI oil futures contracts as of last week. With that contract set to expire Tuesday, the buyers of that “paper oil” have to sell or take physical delivery at the end of May. ETFs like USO are not created to take physical delivery of the oil contracts they hold, so in a long squeeze, the fund’s managers have to dump oil.
I just did some digging into this and it appears not to be true. USO rolled all of their May contracts to June contracts between April 7th and 13th. All of the speculators and funds have been out of the May contract for at least 8 days. This selloff was likely driven just by spot traders who were unable to take delivery on a contract that expires tomorrow.
Historically crude futures contracts had a lower bound of $0. On April 9th of this year the CME group released the following notice. https://www.cmegroup.com/content/dam/cmegroup/notices/clearing/2020/04/Chadv20-152.pdf.?mod=article_inline It states that if any oil futures contract settles below $8 it will immediately be switched to pricing model that supports negative prices. At noon on April 20th the May oil contract dipped below $8 which must have triggered this new pricing structure. It hit zero just two hours later and then quickly sold off to negative 40 in the next 30 min. According to this notice Gasoline and Diesel also have similar trigger prices that will allow them to have negative pricing.
Interesting, thanks for the research. My wagering partner told me on the 15th that he heard rumors about COMEX updating their software to accommodate negative oil prices. James Hamilton has a good plain language explanation. The anchor for the system is the fact that the buyer has the right to receive physical delivery if they choose to hold the contract to expiry, and could plan to put the oil into storage or ship it immediately into another pipeline. If I can store the oil in Cushing for a cost of a few dollars a barrel, that’s a valid option. But the higher the cost of storage, the bigger problem I’ll have on my hands if I actually take physical delivery. ...The bigger picture is that the flow of oil headed for delivery to Cushing in May was bigger than the consumption in May, and there was no easy way to store the surplus. That caught buyers of the May futures contract in a squeeze, unable to close their positions at the terms they expected. The situation will be helped some as upstream producers shut down. But the bigger problem is that demand for oil has collapsed. People aren’t flying in planes and they’re not driving to work.A month ago there were around a half million such contracts outstanding, promising delivery of half a billion barrels of oil to Cushing in May. That’s far more than could ever be physically delivered, and it’s perfectly normal. In the vast majority of those contracts, the buyer had no intention of receiving oil and the seller had no intention of delivering oil. The plan of the buyer was to sell the contract to somebody else before time for delivery, and enjoy the gain if they sell for more than they bought. The seller likewise planned later to buy a contract; in effect, their original offer was a short sale, which they later cover by buying. You can think of the second contract that closes each individual’s initial position as between the same two parties as the original contract, so that the two trades exactly cancel. For most of the original contracts, no oil actually changes hands in May.
So the story is actually, "Some people placed bets on their pony to take first place, but as it cleared the last bend and approached the finish line, it was evident to everyone in the stadium that their pony was in dead last place. So they tried to convince someone else to buy their losing ticket off them, so their wife wouldn't find out when they got home." Ok. Well. Maybe not exactly right (because an oil future has a value after the end of the race, while a losing ticket does not), but I'm only 1/3 of the way through my first cup of coffee this morning...