Analysis

US Oil Futures Fall Below Zero Again, Can We Expect More?

WTI futures price has fallen back below zero for the second day in a row.

Monday delivered a historic day for the trading markets, with the price of oil falling into negative territory for the first time in history, driven downwards by the coronavirus pandemic, which has destroyed around a third of global fuel demand since early March. 

In particular, WTI futures (West Texas Intermediate) for May, which are due to expire today, settled at USD -37.63 on Monday, falling USD 55.90, and even sinking as low as USD -40.32. This Tuesday, WTI futures have fallen back below zero for the second time in history.

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Chris Nelson-Smith of Vantage FX
Chris Nelson-Smith, Head of Risk at Vantage FX

Chris Nelson-Smith, Head of Risk at Vantage FX explained the situation to Finance Magnates: “Under normal market conditions, traders holding the WTI contract at expiry have to take physical delivery of the oil.

“To avoid delivery traders will normally roll the current futures contract into the following month, in this case from May to June. This morning however, traders that were holding the May contract found themselves unable to roll it into June as there were no buyers for it due to a lack of demand because of the global economic slowdown.

“They also had no storage to have it delivered either, ironically some of the biggest futures traders have absolutely no experience on the physical side at all. The WTO contract is deliverable in Oklahoma and the storage facilities are pretty much full up there, as they are all over the world. This led to traders basically paying up to $40 per barrel to avoid delivery and have the contracts taken off their hands.”

Traders willing to pay to get rid of oil contracts

Charalambos Pissouros of JFD Bank
Charalambos Pissouros, Senior Market Analyst at JFD Group

Charalambos Pissouros, the Senior Market Analyst at JFD Group further highlighted: “Due to the measures adopted worldwide in order to contain the coronavirus, billions of people have stopped travelling, with the result being much higher supply than demand levels. 

“Thus, with storage tanks getting full, holders of May contracts may have preferred to get rid of them as they may have wanted to avoid delivery and the extra storage costs. They were willing to pay other people in order to take the contracts off their hands.”

Will history repeat itself… again?

Although May’s contract plummeted, the June contract was still trading at $20, although it too was largely down on Monday. However, as pointed out by Nelson-Smith, storage is tipped to max out mid-May so if demand does not pick up before then the June expiry might settle in the same way.

Filip Kaczmarzyk of XTB
Filip Kaczmarzyk, Head of Trading Department at XTB

Speaking to Finance Magnates, Filip Kaczmarzyk, Member of the Management Board, Head of Trading Department at XTB, said: “Theoretically I see this happening again and the main reason for this is of course the pandemic lockdown but also the OPEC supply war and storage facilities reaching their capacity limits. 

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“Unless the pandemic restrictions are lifted or another agreement between oil drillers is reached, I believe that technically we can experience the same issue at the contract expiration date. However, realistically I do believe one of the above happens and we don’t see a similar situation in the near future.”

Dmitriy_Gurkovskiy of RoboForex, oil
Dmitriy Gurkovskiy, Chief Analyst at RoboForex

Dmitriy Gurkovskiy, Chief Analyst at RoboForex explained that oil producers failed to react timely to the change in demand, which has led to the events in recent days.

“The recent failure of the WTI short-term contract demonstrates that no one needs oil right now,” Gurkovskiy continued. “However, the prices of long-term contracts show that investors expect smooth restoration of economies after the coronavirus quarantine and equally smooth restoration of oil prices. Anyway, presently, WTI futures for May are at zero (-100%) and cost nothing.

“By the middle of May or the beginning of June, global economies will begin coming back to normal, and the demand for energy carriers will recuperate naturally. Oil prices will start growing, having a fundamental reason for it.”

Complications for brokers

Although Kaczmarzyk outlined that none of their clients of the broker itself faced any complications, due to the fact that it had already moved out of the May contract, it did notice complications faced by its competitors.

“… a lot of our competition quoted the May contract yesterday but stopped when the price reached 0,” he said. “The question is whether the systems did not allow the prices to go into negative or it was their decision. I can imagine them being flooded with complaints from traders who had short exposure and were not able to trade the negative price.”

Adding to this, Nelson-Smith said that yesterday’s events caused a disparity of cash prices between brokers: “Financing charges on the cash product are also higher as a result of the large gaps between futures contracts, it is important clients have a full understanding of the markets they are trading.

“We also strongly recommend that they trade cautiously, continue to monitor their positions and maintain a sufficient account surplus throughout these turbulent times.”

As Finance Magnates reported, as oil prices breached the negative territory, brokerage platform Trading212 has suspended the Oil-21Apr futures contract. Other brokers have taken similar measures.

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