What does it signify when a futures price is negative?
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).
Is it possible for futures to be cheaper than spot?
Backwardation is the term for this condition. Traders will sell short the asset at its spot price and buy the futures contracts for a profit, for example, when futures contracts have lower values than the current price. This lowers the projected spot price over time, finally bringing it in line with the futures price.
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.
What happens if the futures market becomes negative?
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.
Can commodities prices fall below zero?
Negative commodity prices are nothing new, since other raw commodities have fallen to the point where sellers are willing to pay purchasers to take their goods off their hands. While some markets have witnessed zero or negative pricing, others have never seen it.
Another futures market, aside from onions, has traded at or near zero. The electricity or power market is a use-it-or-lose-it market. Electricity is transmitted over transmission lines, and if it is not utilized by a party with a long position, it becomes worthless or even trades at a loss.
How do futures pricing influence spot prices?
A downturn in the economy could reduce consumer demand for precious metals, lowering prices. Futures traders strive to benefit from the difference between the fixed futures price and the value of the commodity when it is ready to be delivered. The spot price is that value.
What impact do futures contracts have on price?
Futures contracts are used by buyers of food, energy, and metals to set the price of the commodity they are purchasing. As a result, their risk of price increases is reduced. Futures are used by sellers of certain commodities to ensure that they will receive the agreed-upon price. They eliminate the possibility of a price decline.
Is backwardation a negative or bullish sign?
Backwardation is a bullish indication for oil since it suggests traders no longer have an incentive to keep oil and sell it later. Instead, they should sell oil now rather than later because future prices may be lower.
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.
Is it possible for oil futures to go negative?
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.”