On April 20, a crude oil futures contract (a contract that sets a price today for...

On April 20, a crude oil futures contract (a contract that sets a price today for delivery at some day in the future) price for May delivery was negative, which meant the seller (Owner of the contract to sell the oil) of the crude oil would have paid the buyer to take delivery of the crude oil. From what you learned in chapter 3, on Supply and Demand, how would you explain this (Perhaps a graph would help)? What were some reasons given for this unusual situation? Can you think of other things where the owner (seller) of an object “pays” the buyer in order for the buyer to take delivery of the object?

Expert Solution

crude oil futures contract price for May delivery was negative this was because already the oil market was not doing well and COVID added to the problem. generally when the futures contract is about to be expired, the seller close the contract by taking a long position (i.e. by bying a futures contract). But in this situation, the supply of oil was far more than the demand which led to the decrease in price so much that it turned negative. Secondly, there are no storage facilities, even if the buyer takes the delivery the storage cost he will have pay would exceed the price of the oil futures and hence this situation arised.

this can happen with commodities futures as well due to the same reasons. for eg, wheat, rice etc.

Rahul Sunny answered 2 years ago

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