How negative oil prices revealed the dangers of the futures market

KEY POINTS
  • A historic drop occurred on April 20, when the price of West Texas Intermediate crude dropped by almost 300%, trading at around negative $37 per barrel. 
  • The crash in demand that followed the spread of Covid-19, along with a price war between oil giants Saudi Arabia and Russia in early March spurred the move into negative prices. 
  • As the delivery date for WTI grew near, investors began a massive sell-off to take the contract off their hands.
  • The price of oil has steadily recovered, jumping nearly 90% in May and registering the best month on record for WTI.

Pivot Points

S1: 38.01

S2: 36.26

S3: 35.35

A historic drop occurred on April 20,  when the price of West Texas Intermediate crude dropped by almost 300%, trading at around negative $37 per barrel. 

The price of oil has steadily recovered, jumping by nearly 90% in May and registered the best month on record for WTI. However, the petroleum industry is still reeling from the effects of the coronavirus pandemic. Major companies like Chevron, Exxon and ConocoPhillips have announced deep production cuts and Whiting Petroleum in April became the first major company in the industry to file for bankruptcy protection.

The crash in demand for oil that followed the pandemic played a major role in the move to negative prices. “At the trough, we probably saw demand in April bottom out down 30%. So we’ve never seen anything like this certainly in the last 40 years since world oil markets have developed,” said Severin Borenstein, a professor of business at the University of California, Berkeley.

WTI is special in a way because it’s so tightly connected to physical oil,” said Derrick Morgan, senior vice president of American Fuel & Petrochemical Manufacturers. 

Experts think the impact of the turbulent prices will likely be more severe for the U.S. shale industry, which is often in heavy debt due to its high production costs.

Source : CNBC


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