Question

Why did the May futures price of WTI Crude go negative when the May Brent Futures price did not go negative?

Answer 1

ANSWER DOWN BELOW. FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

Step1:

1. Most of the oil is traded through Futures Contracts.

There are two main Futures Contracts (remember this is simplified) - The WTI and the Brent.

WTI refers to the Oil from North America, while Brent refers to oil from Middle-east, Europe and Russia .

2. The "Oil Price" which has gone negative is the settlement prices for the May 2020 Delivery Contract.

3. There are two forms of settlements for Crude Oil Futures Contracts i.e Net Settlement and Physical Delivery.

4. The net settlement is the one in which it allows the buyers of the contracts to settle the financial difference between the buying price and the settlement price.

Step 2:

The Reason why WTI has gone negative is:

5. If a buyer of a Futures Contract is not opting for net settlement on or before the "Notice Date", which passed on 20th April 2020 for the May 2020 Delivery, then they are assumed to be taking physical delivery of the underlying quantity of Crude Oil.

6. That is the "technical problem" which is pushing the settlement price of May 2020 Delivery Contracts to become negative.

7. There are large buyers, who are stuck with physical delivery of options, that they can't actually use and they also can't take physical delivery of the underlying crude oil because they don't have the storage capacity for this.

7. The negative price indicates that they are getting some party, probably a refiner, or a storage facility or a driller, to take the delivery off their hands by PAYING them to buy the oil that's ready for May delivery.

8. It's never occurred before in the history of Crude Oil Futures trading. It's a very unusual situation.

9. However, the June delivery WTI futures are still trading in the positive area at $20+/ BBL. And the Brent Futures for June 2020 delivery are trading at $25+/ BBL.

10. Implications:

It means that the US Crude Oil producers are now facing a big problem and if they don't stop drilling, they will have to give the oil away for free, and/or pay people to buy that oil.

11. This oil can't be thrown out or disposed of off since that will cause an environmental catastrophe and result in billions of dollars of penalty Eaxmple: Exxon Valdez, Deepwater Horizon, etc.