Another Historic Day for Oil - Yesterday WTI Traded at a Negative Price!

NYMEX WTI settles in negative territory for the first time in history

The price of NYMEX WTI oil settled yesterday at minus 37.63 USD per barrel, down 55.90 USD since Friday. The selling is related to the contract expiring today, a lack of storage space, and low buying interest.

Oil was priced in a way that left market veterans shrugging their shoulders.

“Books will be written about today” - oil’s incredible plunge leaves people shocked and searching for answers..

No, your monitor is not malfunctioning. :) This is the real price for the May WTI futures contract, which expires today. Note: most trading platforms are already showing the WTI price from the new futures contract, meaning the June contract. Check the list of WTI futures contracts.

WTI oil prices made history yesterday, finishing in negative territory and implying that investors would have to pay buyers to take a barrel of oil. This is what happens when the world stops in the face of a pandemic and oil companies are left storing surplus in rented tanks.

“It is like trying to explain something that is unprecedented and seemingly unreal!” wrote Louise Dickson, an oil markets analyst at Rystad Energy.

WTI futures contracts are collapsing, while Brent contracts are also falling but still holding up...

The explanation is simple:

First, we need to consider what is actually being traded here. On one side, the collapsing contract is traded on NYMEX. Now consider the following about this contract:

1. This contract stops trading on April 21 (today).
2. This contract is physically settled.

This second point is critical. It means that whoever holds the contract long, when trading stops, will have to take delivery of physical oil. 

Now consider what the Brent contract traded on ICE actually represents:

1. This contract stops trading on April 30, so it is very comparable with the May 2020 WTI contract.
2. This contract is cash settled.

What that second point means is that any speculator can hold this contract until the end of trading and after expiration. 

Conclusion

The extreme selling you are seeing in Monday’s WTI contract, which will be in the news everywhere today, is driven by this simple mechanism. In this previous-month contract there is extreme forced selling, because any speculators who cannot take physical delivery must sell these contracts today, regardless of the situation.

This does not happen in Brent simply because Brent crude contracts are cash settled. As a result, any speculator can carry them to expiration without being forced to sell at any price, a “luxury” that is not available in WTI futures contracts.