Question

U.S. oil benchmark crashes below $0 a barrel to mark historic plunge

1. Review   and discuss the collapse of the Futures Oil Market, which   fell into the negative realm in May 2020.                                                                                      

What were the main reasons for this fall into the negative realm? Critically discuss.

Answer 1

US WTI futures May 2020 contract crashed to negative $ 37.63 and this was a significant even in the history of Oil markets. As oil have never turned to negative territory since it started trading but due to demand shock and other factors this event became possible. However prices remained in negative territory for a while and then quickly recovered later.

This event means that suppliers have started paying you for purchasing oil from them as there was no capacity in the US to hold oil and at the same time other countries were not either eilling to buy oil because of demand shortage. Everywhere countries in the world had filled their oil reserves, ships were filled with oil in the dockyard, and when the time for delivery of oil came there was no one to take delivery of oil at Oklahoma (delivery place for US WTI futures).

This even was rare and caused because of many events occured at the same time.

1. Demand shock due to coronavirus pandemic- There was sudden drop in oil demand due to shutdowns of economy, flights operations were stalled, industrial production halted and people stopped travelling. This has reduced global demand of oil to collapse.

2. Filled reserves - Everywhere countries have filled their oil reserves and other capacities were filled to their brim. Now the cost of storage has went up so much that it has made price of oil negative as now it was costing more to store oil than the price it could be sold for.

3. Panic Selling in markets - As this was one off event, this event shocked markets and everybody was trying to get rid off their contracts. Therefore sudden supply increases in futures market with no buyer was willing to take delivery, price went to negative as traders were just trying to get out of contract. As more and more margin calls were hitted this has exacerbated the downmove.

Please Upvote and Support!!.

Thanks