Impact of NEGATIVE Oil Prices

Oil Prices

A recent lesson from Commodity Trading 101.

On Monday, the May futures contract for West Texas Intermediate crude oil lost almost $59 per barrel during the day’s trade. It started the day at $18.27/barrel. So, at some point, it was “worth” a NEGATIVE $40.32 per barrel. I have occasionally spoken about the “fairness” of the Board of Trade prices since there cannot be a price unless there is an actual buyer and an actual seller. So, this means that someone sold this number of negative $40.32/barrel and someone else bought it. Keep in mind that each contract is 1,000 barrels, meaning on just one contract, someone lost close to $59,000 on Monday. Who knows what level they originally bought it, or how many contracts they “owned” when trading started Monday. 

The reasons behind all this dramatic action are somewhat complicated, but it has to do with the delivery mechanism of any commodity on a board of trade. In the details of the contracts, there are provisions for making delivery if you are “short” a commodity as well as provisions for taking delivery if you are “long” a commodity. My understanding is that the entity that was long the May futures contract had no ability to accept delivery, and the “official” delivery location was completely full, so they couldn’t store it either. Their options were very limited, they had to get out of their contract(s), and not take delivery. 

Occasionally, we have situations where we have to remind customers of their deadline to price or roll a contract tied to the Board of Trade. This is a good example of why we do that. If you are “long” futures, you don’t want to be forced to send trucks to a warehouse in Chicago to pick up 5,000 bushels of corn or soybeans. The economics rarely, if ever, work out well. 

The same holds for our merchandising team. As we are buying cash grain, we are hedging it by selling in Chicago, and therefore becoming “short”. We want to be out of that position before it enters the “delivery period”. The last thing we want to do is be forced to deliver grain to some warehouse in Chicago. It would be cost-prohibitive. So, we either roll it to a month further out, or we sell cash grain and lift our hedge.