years on the market
On April 20th, the oil market was shaken by a unique historic collapse of WTI crude oil futures contracts: the price went below zero, as low as minus $40 per barrel. The spot price at the time was $15. Can there be a negative oil spot price, and should private traders speculate in it now? Let’s figure this out.
For the first time in history, the price of a barrel of oil dropped below zero. WTI futures contracts for May delivery reached almost minus $40 per barrel on April 20th. But how is this even possible?
April 21 was the expiration date of the WTI crude oil futures contract for May delivery, but those who bought it had no intention to physically claim and store the thick black liquid. There’s no demand for oil right now, oil reserves are more than half-filled everywhere in the world, fuel storage gets more expensive, oil production hasn’t been cut by much, and there’s no one to sell it to.
The hapless investors wanted to turn to new contracts, for June delivery, and pay the fines. However, they were met with refusal, as the suppliers themselves struggle to bear the costs of storing the massive amounts of oil. The market players throw it around like a hot potato, but when someone doesn’t want to catch, it burns with surging shipping and storage prices.
And so it happened that investors had to pay to take the May contracts off their hands—even $40 per barrel. Because otherwise, the investors would have had to pay way more for the infrastructure.
Spot market, as it turned out, also has its anomalies. Prices of spot contracts for other oil brands also went negative for a short while. North Sea oil Brent dropped to −$3, while Russia’s Urals reached −$3.5 per barrel. At this highest point of drama, spot price of the same WTI oil was about $15, and went further down to $3.38 only on April 22nd.
Usually, futures prices are higher than the instrument’s price on the spot market. The reason is the expenses for storage, shipping, insurance, and other costs that are inevitable in case of future delivery.
However, now futures contracts are not only cheaper than the underlying asset, investors effectively pay a reward comparable to the last year’s price of a barrel to someone who would have it.
It’s important to note that the current unique situation with negative oil prices is a short-term affair at the moment before a particular contracts expires and can’t be traded anymore. It’s not in any way indicative of how much oil is worth today and in general. For private traders who speculate in oil prices per barrel and don’t bear any obligation to receive and deliver actual oil, the price remains positive and can’t go below zero.
Should you buy oil considering the current coronacrisis? Yes, but look only at short-term speculative purchases at least for the next two months. The market will continue to run wild until the global economy stabilizes, which means until at least the middle of the summer.
Considering all this, CFD trading looks more appealing than stock contracts. Right now the liquidity for CFDs is better than for stock assets, and both Buy and Sell orders can be placed at any moment. This instrument allows speculating for a rise or a drop of the price in a short period. Moreover, the trader doesn’t need to worry about a delivery man knocking on their door with an oil tanker.