US crude oil price reality: A simplified version of news about the crude oil going negative. Let’s discuss the US crude oil price reality further.
- US Crude witnessed $ 0 bbl news happened in Crude WTI (Future & Options) FNO, where most of the oil traded via Futures Contract. It never happened before in the history of Crude Oil Trading.
- Two famous Future Contracts
- West Texas Intermediate (WTI) – Oil from North America
- Brent – Oil from the Middle East, Europe & Russia
- Oil Price that gone negative is the settlement price for May 2020.
- Settlement happens in two forms for Crude Oil Future Contract which is Net Settlement and Physical Delivery. Net Settlement – Allows buyers to settle the financial difference between buying price & settlement price
- In case of Future Contract, the buyer does not opt for net settlement on or before notice period as the same incident happened last week for “May 2020” delivery, then it is assumed to be taking physical delivery of the underlying quantity of Crude Oil.
- Buyers stuck with a physical delivery option that means that they have to take physical delivery which is not possible as they don’t have storage capacity which pushed the May 2020 Delivery Contract into negative.
- As Future Crude Oil Price touched -37 points means sellers were paying buyers (refiner, storage facility, or a driller) to make deliveries in a bid to avoid incurring storage costs.
- Texas Crude Oil Producers are facing a problem of glut.
Oil bears, riding on the fever-pitch negative sentiment in crude since Monday’s historic subzero prices, pounded the West Texas Intermediate’s June contract by 54%, or $11.30, to $9.15 per barrel as U.S. benchmark poised for its lowest finish in 21 years. (Yahoo Finance)
Crude oil prices going ahead will depend on how long the lockdown stays and whether there is an extension. Experts say expectations are that production will fall by 1.7-2.0 million BPD by end-2020. It remains to be seen if the pace of the production fall will enough to stem the collapse in price.