The oil price crash is not as bad as it looks

Today, there is something in the crude oil market that has never happened in history: crude oil futures contracts fall to negative values.

WTI may crude oil futures settled down $55.90, or 305.97%, at $37.63/barrel at 2:30 EDT, closing negative for the first time in history. Although many people think the overall price of oil is negative as a result, it is still slightly different from the actual situation. Not all crude oil is free or cheap.

The situation in the crude oil market is not as bad as the headlines say.

A futures contract is related to a specific delivery date. At the end of the contract's validity period, the price will usually be the same as the actual price of oil, because the ultimate buyer of these contracts is the entity that will make the actual oil delivery, such as the refinery or airline.

A futures contract is ultimately a physical delivery contract for underlying 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, traders start to buy futures contracts for the next month. Those who hold positions until the last day usually buy physical goods, such as refineries.

WTI contracts that fell more than 300% on Monday were delivered in May and expire on Tuesday. There was no demand for the oil contracts due Tuesday, as the coronavirus pandemic led to an unprecedented reduction in demand and depleted storage space.

That's why prices have turned negative, which means producers will have to pay a price to get rid of the oil, which is no longer needed this week due to the economic blockade.

Futures contracts are traded on a monthly basis. The WTI contract fell 16% in June to about $21.04 a barrel.
As a result, oil prices will return above $20 when the contract expires on Tuesday and may.

U.S. oil funds, which track the prices of various oil futures contracts, fell just 10%.

In addition, the trading volume of WTI contract in May is relatively small. According to Zhishang, the trading volume is about 126400. By contrast, the volume of June contracts was close to 800000.

John Kilduff of agricultural capital attributed the collapse of contracts in May to "the state of the physical crude oil market is a disaster and there are growing concerns about available storage space."

In the long run, Kilduff says the outlook for crude looks better.

"Higher price and longer term futures contracts indicate that the market expects some degree of liquidation in the cash market in the coming months," he said. This is a reasonable assumption given the rapid decline in the number of U.S. oil rigs and OPEC + member production reduction expectations. "