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Describe how contango in wti oil futures contracts caused a negative price of wti oil futures...

Describe how contango in wti oil futures contracts caused a negative price of wti oil futures to occur

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Expert Solution

Contango is a situation where the futures price of the contract is higher than that of the spot price of the contract.

in past few weeks oil prices has continuously slumped because of the fears of coronavirus and at a point of time during the past week, when the future price of the oil was trading in negative.

At the times when there is high optimism in the market the future price trade at a premium to that of the spot price of a contract, this situation is contango in the market but when there is environment of extreme pessimism in the market these premiums turn on to the negative sides and spot prices start to trade higher than the future price, and future price are continuously trading lower so that happened in the oil futures as there was extreme pessimism and the oil futures went into even negative because of the storage problem and high volume of unwinding who were long earlier.

so the contango at the point of extreme optimism can cause a backwardation at a time of extreme pessimism.

jeff jeffy answered 2 years ago
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