Question

2.i) 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?

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

Answer 1

Answer:

2.

i)

US WTI futures May 2020 agreement collided with negative $ 37.63 and this was a noteworthy even throughout the entire existence of Oil markets. As oil have never a gone to negative area since it began exchanging however because of demand stun and different components this occasion got conceivable. Anyway costs a stayed in negative territory for some time and afterward immediately recovered later.

This occasion implies that providers have begun paying you for buying oil from them as there was no limit in the US to hold oil and simultaneously different nations were not either eilling to purchase oil due to demand deficiency. Wherever nations on the planet had filled their oil reserves, ships were loaded up with oil in the dockyard, and when the ideal opportunity for conveyance of oil came there was nobody to take conveyance of oil at Oklahoma (conveyance place for US WTI prospects).

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ii)

This event was uncommon and caused in view of numerous occasions occured simultaneously.

• Demand stun due to coronavirus pandemic:There was unexpected drop in oil demand because of shutdowns of economy, flights activites were slowed down, industrial production stopped and individuals quit voyaging. This has decreased worldwide demand of oil to fall.
• Filled reserves : Everywhere nations have filled their oil holds and different limits were filled to their brim. Presently the expense of storage capacity has went up so much that it has made cost of oil negative as now it was costing more to store oil than the value it could be sold for.
• Panic Selling in markets : As this was one off occasion, this occasion stunned markets and everyone was attempting to get free off their agreements. Consequently unexpected supply increments in futures market with no purchaser was eager to take conveyance, cost went to negative as dealers were simply attempting to escape contract. As increasingly more margin calls were hitted this has exacerbated the downmove.