WTI May crude oil futures settlement fell 55.90 US dollars, a decrease of 305.97%, to -37.63 US dollars / barrel, the first time in history to close at a negative value. Although many people think that the overall price of oil is negative, it is still slightly different from the actual situation. Not all crude oil is free or discounted.
The situation in the crude oil market is not as miserable as media headlines say.
Futures contracts are related to specific delivery dates. At the end of the contract’s validity period, the price will usually be the same as the actual price of oil, because the final purchaser of these contracts is the entity that will deliver the actual oil, such as an oil refinery or airline.
Futures contracts are ultimately physical delivery contracts for basic commodities or securities. Although some pure virtual traders in the market are buying and selling contracts, other trading entities are actually buying and selling because they will use the goods themselves. When the contract is about to expire, the trader starts to buy the futures contract for the next month. Those who hold positions until the last day usually buy physical goods, such as refineries.
The WTI contract, which fell more than 300% on Monday, was delivered in May, and the contract expired on Tuesday. Due to the unprecedented decrease in demand for the coronavirus pandemic and the depletion of oil storage space, there is no demand for the oil contract that expires on Tuesday.
This is why the price becomes negative, which means that producers will have to pay to get rid of this oil, because with the economic blockade of various countries, there is no demand for this crude oil this week.
Futures contracts are traded on a monthly basis. WTI’s June contract fell 16% and is currently at about $ 21.04 per barrel.
Therefore, after the May contract expires on Tuesday, oil prices will return to above $ 20.
The U.S. oil fund, which tracks the prices of various oil futures contracts, fell only 10%.
In addition, the trading volume of the WTI May contract is relatively small. According to data from CME Group, the transaction volume is about 126,400. In comparison, the volume of the June contract was close to 800,000.
John Kilduff of Again Capital attributed the May contract plunge to “the physical crude oil market conditions are a disaster, and people are increasingly worried about the available storage space.”
In the long run, Kilduff said the outlook for crude oil looks better.
He said: “Higher-priced, longer-term futures contracts indicate that the market expects a certain level of liquidation in the cash market in the coming months. Given the rapid decline in the number of U.S. oil rigs and the production cut expectations of OPEC + members, this is a reasonable Assumptions.”
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