Yesterday was the historic day of trading in the global crude oil market that saw the West Texas Intermediate (WTI) price (to deliver in about a week’s time) drop below zero. At one point traders were paying more than $30bbl to have oil taken off their hands. Such a disastrous price dip reflects supply glut and a lack of storage capacity given the collapse in demand. Other crude oil prices also moved down, with Brent crude currently at around $25bbl.

If the oil industry wasn’t taking the level of demand destruction seriously, it certainly will now after crude oil futures went negative. The WTI May futures contract traded below USD40/bbl, as buyers deserted the market.

Please be noted that the spot prices are still trading a tad below $18 levels (while articulating), with the WTI May futures contract due to expire, anyone holding a contract would be forced to accept physical delivery. With storage facilities filling fast, particularly at the WTI pricing point, Cushing, there are fears that there would be nowhere to store it. The contract eventually closed the session at USD37.63/bbl.

While negative prices are hard to fathom, they are rooted in reality. Many physical crudes in North America have been trading in single digits for weeks. Bakken crude, a major oil product in the US fell below USD9/bbl last week. West Canadian Select, another major crude fell as low as USD4/bbl nearly 10 days ago. So it’s no surprise that as the front-month futures contract reaches expiration, it has naturally gravitated towards the spot price.

Foreseeing such a turmoil in the energy market contemplating dislocation in the demand/supply equation here, we had advocated shorts in CME WTI futures contracts of far-month tenors with a view to arresting further dips, since further price dips are foreseen we would like to uphold the same strategy by rolling over these contracts for May month deliveries. Courtesy: JPM