Can Crude Really Trade at Negative Prices It just did

May Crude Oil WTI Futures traded down to -$40.32!

Background

A futures contract is a legal agreement to buy or sell a particular commodity asset, or security at a predetermined price at a specified time in the future (Investopedia). Futures trade in monthly contracts, which expire a few days before the month begins. For example, May 2020 WTI Crude Futures expire tomorrow, April 21^st, 2020. However, if someone wants to hold an expiring futures contract longer, they must roll the contract forward to a future month, which is usually at a premium to the expiring month. This is typically done a week or so before the expiring contract so that there is still plenty of liquidity and to make sure there are no errors. Otherwise, one would have to take delivery of the product (for example, 1 Crude oil WTI contract equals 1,000 U.S. barrels).

There has already been a glut of oil in the market beginning with the economy slowdown caused by the coronavirus. This slowdown significantly decreased the demand side of the equation. In addition, in February Russia refused to cut back production with OPEC. Therefore, Saudi Arabia decided they would not cut back either, and turned the pumps on full throttle. Oil is being stored on barges out at sea right now because there is nowhere else to store it. This increased the supply side. When demand is greater than supply, the price goes up. When demand is less than the supply side, the price goes down.

What Happened Today

May WTI opened the day at $17.73. Most futures contracts to be rolled to June have already been done, so liquidity in the May contract was already thin. As the day wore on, there were still those who needed to get out, however the price of the June contract was relatively stable between $22 and $23. Therefore, as the price of the May contract moved lower, the premium you had to pay to roll to the June contract became more expensive. This led to eventual capitulation of the holders of the remaining May contracts and the “get me out at any price” mentality, so they would not have to take delivery (add in any algos pushing lower as well).

Price traded to a low of -$40.32! This means that people who owned May WTI oil contracts were willing to pay someone $40.32 to take the oil from them or take delivery on the oil at expiration tomorrow. Price closed at -$37.11.

Source: Tradingview, NYMEX, FOREX.com

What Happens Now?

The price of the June Crude Oil WTI contract is currently trading above $21.00. Owners of May Crude Oil WTI futures contracts will take delivery if they don’t get out tomorrow. OPEC++ has agreed to cut back production on May 1^st. There is already a supply glut. The key will be on the demand side. Traders who own the June contract believe that demand will pick up, to the point where enough Crude Oil will be needed so that it will be worth $21.00 a barrel. However, if demand does not pick up, or if oil producing countries don’t abide by the supply cut, then price could move lower and the same thing may happen at expiration to those who haven’t rolled to the July contract. There is still 1 day left in the May contract. Perhaps it bounces back tomorrow, and owners of the May contract can get out at a positive price!

If you hear someone today say that crude closed below $0.00, just remember that it was the illiquid May futures contract, and not the underlying spot market contract. However, if the global economy does not pick up soon, one day it may be the spot market price!

StoneX Europe Ltd makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. We are not under any obligation to update any such material. Any opinion made may be personal to the author and may not reflect the opinion of StoneX Europe Ltd.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Please ensure you fully understand the risks involved by reading our full risk warning.

FOREX.com is a trading name of StoneX Europe Limited, and FOREX.com/ie is a domain operated by StoneX Europe Ltd, a member of StoneX Group Inc. StoneX Europe Ltd, is a Cyprus Investment Firm (CIF) company registered to the Department of Registrar of Companies and Official Receiver with a Registration Number HE409708, and authorized and regulated by the Cyprus Securities & Exchange Commission (CySEC) under license number 400/21. StoneX Europe is a Member of the Investor Compensation Fund (ICF) and has its registered address at Nikokreontos 2, 5th Floor, 1066 Nicosia, Cyprus.

StoneX Europe Limited is registered with the German Federal Financial Supervisory Authority (BaFin). BaFin registration ID: 10160255

FOREX.com is a trademark of StoneX Europe Ltd, a member of StoneX Group Inc.

The statistical data and the awards received refer to the Global FOREX.com brand.

This website uses cookies to provide you with the very best experience and to know you better. By visiting our website with your browser set to allow cookies, you consent to our use of cookies as described in our Privacy Policy.

Through passporting, StoneX Europe is allowed to provide its services and products on a cross-border basis to the following European Economic Area ("EEA") states: Austria, Bulgaria, Croatia, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden.

Additionally, StoneX Europe Ltd is allowed to provide Investment and Ancillary Services to the following non-EU jurisdiction: Switzerland.

StoneX Europe Ltd products, services and information are not intended for residents other than the ones stated above.

Tied Agent Information: KQ Markets Europe Ltd with Company No. HE427857.
Address: Athalassas 62, Mezzanine, Strovolos, Nicosia Cyprus.
Services Provided: Reception and Transmission of Orders.
Commencement Date: 06/12/2022
Website: KQ Markets - CFD Trading | KQ Markets

We may pay inducements, such as commissions or fees, to affiliates or third-party introducers for referring clients to us. This is in line with regulatory guidelines and fully disclosed where applicable.

StoneX Europe Ltd may make third party material available on this website which may contain information included but not limited to the conditions of financial markets. The material is for information purposes only and does not contain, and should not be construed as containing, investment advice and/or investment recommendation and/or an investment research and/or an offer of or solicitation for any transactions in financial instruments; any decision to enter into a specific transaction shall be made by the client following an assessment by him/her of their situation. StoneX Europe Ltd makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. We are not under any obligation to update any such material. Any opinion made may be personal to the author and may not reflect the opinion of StoneX Europe Ltd.