20 – 4 -2020 – A Day to be remembered for Negative Crude Price.
This date looks special and now this date created a history. Will be remembered for CRUDE.
Crude price closed – negative on this date.
Crude futures has never ever traded negative in history, this happened for the first time.
The only thing people discussed on this day was this. Flooded with whatsapp forwards and all over social media.
Though crude is traded 5 days a week, 23:15hr out of 24 hr, but no one cared earlier. This negative price also raised many questions in mind of ours. Lets understand them
SO, What does -ve pricing actually means?
Negative price means the amount paid by the seller of commodity to the buyer.
Seller gives commodity, also gives money, buyer receives commodity and also gets money
In context of crude price here it meant, producer of oil are going to pay money to buyer to buy oil.
You might have come across the meme too, that if you go to a petrol pump to get fuel, you will get petrol and get money too. But let me tell you one thing, that’s not actually happening.
Lets understand the reason of this negative pricing.
Demand had already slowed down due to slowing economy and now demand has completely collapsed due to pandemic crisis of corona. US storage is rising sharply, with reduced consumption.
And this has sky rocketed storage cost of tankers,
Problem is of storing, there is no place to take delivery and store, even if the buyers buy crude, they don’t have storage to store the crude.
For this reason oil traders do not want to take delivery of crude.
Now lets understand what just happened.
Crude is traded in futures market, We need to understand future and derivative and how it works. Futures are financial contract on expiry of which delivery of the commodity is required to be taken in future on price decided today. Now this negative price happens to be on 20th whereas the buyers have to accept delivery of crude on settlement price on expiry date which happens to be on 21st April for the contracts of May delivery.
This means the price of May delivery will be finalized on April 21.
And so oil traders were seen squaring off future positions. Buyers of the contracts were rolling over to next month future and there was no one ready to accept delivery of crude.
For better understanding of this, reader need to have knowledge of Derivatives and Futures. (Will upload a video shortly on this)
Also other contracts are still positive.
This collapse into negative territory is not reflective of the true reality in the oil market.
The current forward crude oil curves for Brent and WTI are now in what the financial press is calling Super-Contango. The contango is very front-loaded, A contango market implies oil traders believe crude prices will rally in the future, encouraging them to store oil now and to sell at a later date.
WTI vs BRENT
WTI is a benchmark for US territory, BRENT is benchmark popular in Europe and Asia. Apprx 2/3 of world has relevance with Brent which didn’t trade -ve.
This was just a short explanation of the complete picture, will shortly upload a complete story through a video.
This story has also been explained in layman language on YOUTUBE
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Thanks for reading, see you again 🙂