Question

In April 2020, the price on some futures contracts for West Texas crude (WTI) fell to -$37.63 a barrel. Why would a seller pay a buyer to take their oil? Please briefly explain.

Answer 1

The May contract for West Texas Intermediate (WTI), a benchmark for US oil, fell over 300 percent to trade at -$37.63, an unprecedented move that brought into sharp focus how much crude producers have pumped oil in a coronavirus-stricken world that doesn't need it.

In a future contract, a buyer typically pays some money down with the promise that they would take delivery of a particular commodity or security on what is called the day of expiry.

While speculators who do not intend to take physical delivery of a commodity exit the position before the day of expiry, only those who intend to take actual delivery of the commodity stay on till the end.

The US WTI May futures, which fell into negative territory, are to expire on Tuesday, meaning anyone who still had the contract had to take physical delivery of the barrels of oil from Cushing, Oklahoma.

Oil prices crashed from the double whammy of a price war between Saudi Arabia and Russia and demand evaporation amid the coronavirus pandemic-induced lockdown across most parts of the globe. (Saudi and Russia later agreed to have cut production but their announcement did little to boost prices.)

The oil oversupply situation has resulted in most storage spaces around the world being full. Storage costs onshore and offshore have skyrocketed in the past month, with super-tankers charging as much as $165,000 a day!

Refineries, which process oil into automotive and jet fuels, and airlines are large buyers of crude oil.

As a result, with WTI May futures set to expire, there appeared to be no takers for the commodity thanks to the storage problem.