Did someone say negative WTI? WTF!
Q: What do you say when the market offers you free oil?
A: No Tanks! 🙂
April 20, 2020 has made a name for itself in history as on this day, WTI prices for May delivery went below zero and settled at -$37.63/bbl. June contracts are trading (April 21, 2020) at $11.16/bbl (Thank God!). Who would’ve thought we would be happy to see oil prices in low teens?
What caused the massively unprecedented event that made all the headlines?
- The expiry of the May futures was on April 21, and some traders held on to long positions (contracts to buy crude) too long and found themselves with no one to sell to. And the only buyers left insisted on being paid to take out the positions (buyers getting paid to take barrels).
- Futures positions that are not settled by April 21 will go to physical delivery of actual oil barrels. Future traders that mostly deal with “paper barrels” are not set up to take delivery of “physical barrels” and have to unwind their positions as contract month closes in on them, no matter the cost.
- This happened because for the past few weeks, U.S refinery demand for crude fell significantly (30%, 40% or more with a couple of refineries shut down entirely).
- Storage in Cushing and along the Gulf Coast is filling up fast (some are predicting that Cushing storage will be full by mid-May).
- All because of demand destruction due to Covid-19 and supply not adjusting fast enough with the lower demand (fewer flights, fewer cars and no where to go to).
Hopefully in June, the traders that can’t take “physical barrels” will be smart enough to get out of their contracts before it is too long like in May. But the underlying problems of low demand due to Covid-19, low refinery utilization and full storage might still remain. This time the oil price crash was caused by “paper barrels” but the next time it could be caused by physical barrels.
Should’ve bought more Oil Tanker stocks…..
