Falling oil prices is not so terrible – and that’s why

US, WASHINGTON (ORDO NEWS) — Today, something that has never happened on the oil market is happening: oil futures prices have become negative. Although many may think that this means that oil prices themselves have become negative, there is one caveat. In short, no, not all oil is free.

The picture on the oil market is not at all as gloomy as you might think by reading this catchy headline. Futures contracts are tied to a specific delivery date. Closer to the contract expiration date, the price of futures usually approaches the physical price of oil, since the end customers are enterprises such as refineries or airlines, which will accept the actual supply of this oil.

Futures contracts are ultimately contracts for the physical delivery of a commodity or securities. While some market participants are trying to speculate on these contracts, others actually buy and sell them because they really use this product. Closer to the contract expiration date, traders simply start buying futures with expiration dates next month. Those who remain in the position until the last day usually buy real goods.

West Texas Intermediate (WTI) oil contracts, which fell more than 100% on Monday, April 20, are WTI futures for delivery in May and expire on April 21. Since the coronavirus pandemic has led to an unprecedented drop in demand and the rapid filling of all storage facilities, there is no demand for these futures, which expire on April 21.

That is why the price of them has become negative – that is, producers are allegedly willing to pay themselves to sell this oil on their own, because this week, against the backdrop of quarantine measures across the country, no one needs this oil.

Futures contracts are traded on a monthly basis. Crude oil futures for June delivery fell 16% to $ 21.04 a barrel. That is, after the May contracts expire on April 21, oil will again return to around $ 20 per barrel.

The US Petroleum Fund, which follows the path of prices for various oil futures, has just fallen 10%. If we talk about the May contracts, the volume of trading operations was also relatively small. According to the CME group, this volume amounted to 126,400. For comparison, the volume of trading on the June contracts amounted to almost 800 thousand.

John Kilduff of Again Capital explained the fall in May futures prices as saying that “conditions in the physical oil market are terrible because there is almost no storage space left.” According to him, in the long run, the picture looks more optimistic. “The higher price of futures contracts with a later delivery time indicates that the market expects a certain level of offsetting in the cash transaction market over the next few months,” he told CNBC.

“Given the rapid decline in the total number of US rigs in operation and the expected decline in production by OPEC + members, this is a reasonable expectation.”

However, he added, when later contracts are approaching the expiration date, they too can embark on their own “death march to ultra-low prices.”

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