What happened to Oil yesterday
US Crude Oil futures turned negative on Monday for the first time in history. So how can it be possible for oil to go down 300% in one day or in any period of time? First, we need to understand that what happened yesterday was not referring to physical oil but rather to oil future contracts. We know already about the rapidly declining demand caused by Covid-19 and we are aware of the Saudi – Russia oil war. This move in oil futures has more to do with factors such as storage limits in Cushing Oklahoma and expiring contracts.
What is an Oil Future Contract
When you trade on futures contract, you must either buy or sell the commodity by the expiration date at the stated price. If you hold a call, the only way to avoid actually having to take physical delivery of 1,000 barrels of crude oil is to offset the trade before the expiration, May in this case.
What is in Cushing Oklahoma
Cushing, Oklahoma is the largest oil-storage tank farm in the world. It has 73 million barrels of working capacity, about 13 percent of total U.S. storage. Several important oil pipelines converge there as oil moves from production sites to refineries on the Gulf Coast
So, people who hold an oil futures contract at the end of the trading window which was yesterday, have to take physical delivery of the oil they bought on the futures market. This is very rare since future contracts usually just roll over to the next contract, the June contract in this case. What is happening here is that traders or speculators who had bought the contract are finding themselves unable to resell it and have no storage booked to get the crude delivered in Cushing, Oklahoma, which is the settlement location for WTI Crude Oil. That desperation created Mondays situation and a negative price of -$37.63 per barrel. Traders were offering money to take their contracts.
Tuesday we will most likely see the price of WTI back in green numbers and hopefully some less confusing headlines. But as long as there are demand issues, the problem will persist and the June futures could see the same issue.
Stay safe and healthy. You can reach me at any time with any questions or concerns you may have.
