WTI Crude Oil - Get paid for Purchasing
This year 2020 will be remembered in global history for a very long time to come. Some boundless imaginations of our wildest dreams have now become a reality. The WTI Crude Oil future became negative, a situation where the cost of one barrel became more than the oil in it.
The clickbait headline of the day is "Crude Oil future collapsed to a historical low of -$37.63 per barrel". Although, I am no crude oil expert, but many people are under the impression that they will get the oil for free and it is a once in a lifetime moment for India.
Let's have a brief look at this Crude Oil sudden demise.
To begin with, the -$37.63 per barrel is a futures contract price, not a spot market price. If you are LONG a future, then unlike an option, you have to exercise it necessarily. When a futures contract expires, traders must decide whether to take delivery or roll their positions into an upcoming contract. Most of the speculators either go for a rollover or take a profit/loss from their position but some big players actually take the delivery of the oil, refineries, airlines etc.
Worldwide oil consumption is roughly around 100 million barrels/day (Wikipedia), but due to this Corona pandemic, the consumption is down about 30% globally with a fall of 27-35 million barrels crude oil per day.
We are now coming to the story of our rabbit caught under the headlight.
WTI Crude Oil futures (West Texas Intermediate) are traded at NYMEX (New York Mercantile Exchange). The massive fall in the price (-$37.63 per barrel) was seen in the WTI Crude futures contracts that were set to expire on Tuesday (Not in Spot price). India does not purchase oil from WTI. We buy it from Brent Crude where the fall seen today was only a meagre amount of 8-9%. Why is it so?
they take in oil from Brent as well.
North American storage facilities in Cushing are almost full (69%, U.S. Energy Department) and there will be no place to put in a new production in the upcoming days.
A fast-growing glut of oil caused traders to roll over their positions rapidly to June, so they don’t have to take deliveries given the lack of space to store them. Even if some big player stores it, where ultimately will they deliver it given the subdued demand. Airlines have already been grounded to a considerable extent.
The United States Oil ETF, USO is another big player behind this WTI crude fall. Of all the outstanding crude contracts in WTI, 25% were owned by USO. But ETF's are not created to take physical delivery. The result was a massive selloff in WTI crude.
The promise by OPEC+ and its peers to curtail the output by 10 million barrels per day will be brought in effect from May and considering the unprecedented global slowdown, this cut also fails to make a drastic impact.
This event has also created an arbitrage opportunity. If you live in Cushing or can ensure that crude is delivered from Cushing to your storage facilities, you can make big profits as you can sell June contracts which are currently trading at around $20 per barrel.
Hopefully, the major economies will be partially back in on the track in the upcoming weeks.
Again, I am no crude oil expert.
 |
| Source: CNBC |
The clickbait headline of the day is "Crude Oil future collapsed to a historical low of -$37.63 per barrel". Although, I am no crude oil expert, but many people are under the impression that they will get the oil for free and it is a once in a lifetime moment for India.
To begin with, the -$37.63 per barrel is a futures contract price, not a spot market price. If you are LONG a future, then unlike an option, you have to exercise it necessarily. When a futures contract expires, traders must decide whether to take delivery or roll their positions into an upcoming contract. Most of the speculators either go for a rollover or take a profit/loss from their position but some big players actually take the delivery of the oil, refineries, airlines etc.
Worldwide oil consumption is roughly around 100 million barrels/day (Wikipedia), but due to this Corona pandemic, the consumption is down about 30% globally with a fall of 27-35 million barrels crude oil per day.
We are now coming to the story of our rabbit caught under the headlight.
WTI Crude Oil futures (West Texas Intermediate) are traded at NYMEX (New York Mercantile Exchange). The massive fall in the price (-$37.63 per barrel) was seen in the WTI Crude futures contracts that were set to expire on Tuesday (Not in Spot price). India does not purchase oil from WTI. We buy it from Brent Crude where the fall seen today was only a meagre amount of 8-9%. Why is it so?
 |
| Source: Investopedia |
The WTI crude is stored at Cushing, Oklahoma. It is the key storage hub and delivery point for the WTI crude contracts. The main point to note is that WTI caters mainly to the interior of North America, where markets still follow the WTI price. Brent Crude decides the price of 2/3rd of the world's internationally traded crude oil. It is extracted from the North Sea and can be delivered offshore especially to the Asian countries, the U.S. and Canadian East Coast and U.S. Gulf Coast. China has recently opened up its economy, and
they take in oil from Brent as well.
North American storage facilities in Cushing are almost full (69%, U.S. Energy Department) and there will be no place to put in a new production in the upcoming days.
A fast-growing glut of oil caused traders to roll over their positions rapidly to June, so they don’t have to take deliveries given the lack of space to store them. Even if some big player stores it, where ultimately will they deliver it given the subdued demand. Airlines have already been grounded to a considerable extent.
The United States Oil ETF, USO is another big player behind this WTI crude fall. Of all the outstanding crude contracts in WTI, 25% were owned by USO. But ETF's are not created to take physical delivery. The result was a massive selloff in WTI crude.
The promise by OPEC+ and its peers to curtail the output by 10 million barrels per day will be brought in effect from May and considering the unprecedented global slowdown, this cut also fails to make a drastic impact.
This event has also created an arbitrage opportunity. If you live in Cushing or can ensure that crude is delivered from Cushing to your storage facilities, you can make big profits as you can sell June contracts which are currently trading at around $20 per barrel.
Hopefully, the major economies will be partially back in on the track in the upcoming weeks.
Again, I am no crude oil expert.
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