Yes, but only on rare occasions. There have been a few times in the past when supply of specific petroleum products outstripped demand to the point where producers were willing to pay customers to take the excess supply off their hands. Furthermore, the futures markets have recorded negative prices for spreads between different grades of oil, natural gas, and other energy goods on several occasions. Negative pricing was only present for a short time, and the markets immediately corrected.
This is contingent on whether crude oil production is cut quickly enough to reduce the amount of oil in stock. Although the June WTI contract is currently in positive territory, oil continues to flow into Cushing, and traders are keeping a careful eye on inventory levels.
No. The fact that a futures contract has a negative price does not indicate that the market is broken. The futures market, on the other hand, would not be working properly if it did not reflect a negative price when supply and demand are that far out of balance.
Negative pricing, on the other hand, pose a challenge to market participants. Trading systems, for example, must be verified to ensure that they can handle negative prices, and risk measurement procedures may need to be tweaked to compute the appropriate margin requirements. As a result, it is critical for all market players to be aware of the possibility of negative pricing and to plan accordingly.
What does a futures price that is negative mean?
When the price of an oil futures contract falls below zero, it is said to be negative. The futures price (the price of oil for future delivery) is frequently higher than the spot price in the oil trading market (the price of oil for delivery today).
Why are futures so pessimistic?
- On April 20, the price of West Texas Intermediate crude fell by about 300 percent, trading at around minus $37 per barrel, setting a new low.
- The slide into negative prices was prompted by a drop in demand following the spread of Covid-19, as well as a price war between oil giants Saudi Arabia and Russia in early March.
- As the WTI delivery date approached, investors initiated a big sell-off to get rid of the contract.
- Oil prices have steadily risen, with May seeing a roughly 90 percent increase, making it the highest month on record for WTI.
Why are WTI futures so depressed?
Negative pricing were caused by a number of factors “The market is delaying action because it believes the problem will go away on its own,” he stated.
Producers did not want to cease output because they hoped the low prices would not persist long and that OPEC+ would not be able to agree on policy right away, according to Tonhaugen. In the meanwhile, “As oil storage became scarce, oil tankers were forced to become floating storage.”
“When the bubble was poised to burst, panic set in, and traders who couldn’t take on or store any more merchandise couldn’t sell,” he explained. They’re “Attempts were made to sell their excess commitments, but no one was interested.
The market, in general, was to blame for the unfavorable prices “Not having experience and being prepared for what was coming,” Tonhaugen added, because pandemics only happen once every generation or less. However, he warned that a pandemic might recur, especially if oil consumption continues to rise “If the price of oil falls back into the red, oil producers, OPEC, and governments will have the experience to deal with it.”
What is the mechanism behind negative prices?
Negative pricing occurs in economics when demand for a commodity falls or supply rises to the point that owners or suppliers are willing to pay others to accept it, thereby lowering the price to a negative value. This might arise because transporting, storing, and disposing of a commodity costs money even when there is no demand for it.
For trash such as rubbish and nuclear waste, negative pricing are common. For example, a nuclear power station may “sell” radioactive waste to a processing company for a negative price, thereby paying the processing business to accept the unwanted radioactive waste. The tendency can also be seen in energy prices, such as those for electricity, natural gas, and oil.
Can equity futures go down in value?
“Two weeks before we announced that we were going to allow negative price trading, we consulted with federal regulators,” Duffy said. “So it was no surprise that this was heading our way. We must take steps to allow the market to settle on a price that reflects the product’s fundamentals. The futures market performed admirably.”
On Monday, the May WTI contracts settled at a negative $37.63, the first time the product had ever traded below zero. The United States Oil Fund, a prominent exchange traded fund among retail investors, changed the structure of the futures contracts it buys and announced a reverse stock split as a result of the high volatility.
The fund did not own any May contracts when the price plummeted below zero, and only expert investors trade in the final days before expiration, according to Duffy. Other commodities, such as natural gas, have previously traded in the negative, according to Duffy.
The CME Group’s CEO stated that futures contracts have always been allowed to trade negative, exposing investors to limitless losses, and that the company does not strive to entice retail investors who may not be aware of the restrictions.
“Small retail investors are not a focus for us. In our marketplace, we look for professional participants. However, they must ensure that they understand the rules, and it is the responsibility of their futures commodities merchants to ensure that all participants are aware of the rules “Duffy remarked.
Will oil futures in June turn negative?
Oil companies are storing more of their product due to poor demand. This month, West Texas Intermediate crude futures have risen more than 40% to above $23 a barrel. In an email, Matrix Global CEO Richard Redoglia stated, “No June will not go negative.”
Can futures ever reach zero?
Futures and forwards have no value at the outset because neither the long nor the short are compelled to pay the counterparty a price. Futures and forwards have no value at the outset because neither the long nor the short are compelled to pay the counterparty a price.