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April 20, 2020 | Holy WTF Moly: WTI May Contract Collapses to Negative -$37

On his site WOLFSTREET.com, Wolf Richter slices into economic, business, and financial issues, Wall Street shenanigans, complex entanglements, debacles, and opportunities that catch his eye in the US, Canada, Europe, Japan, and China. He lives in San Francisco.

It’s not often that we’re served up a WTF moment like this. Just about a couple of hours ago, I published my article about US crude-oil benchmark grade West Texas Intermediate (WTI) and how the May futures contract for it collapsed by 45% to $10 a barrel — US Crude Oil Gets Annihilated Under Targeted Saudi Attack — and I pointed at some of the dynamics. But WTI kept plunging.

This is the near-month May futures contract, which expires tomorrow. It should normally trade close to the spot market price, but has now divorced from it. It has continued to collapse in a breath-taking pace to $8 a barrel, then $4, then $2, then $0, then below zero, then at -$10 and then… and now settled at negative -$37.63 a barrel:

This is obviously completely nuts. Futures contracts that expire the next day should be close to the spot market cash price.

But the WTI spot cash price “only” collapsed by 35% today to $11.70 at the moment. And in terms of prices further out, the June futures contract has plunged by 17% to $20.75. So this is a WTI massacre all around, but those prices are still well into positive territory.

So the disconnect between the May contract (-$37.63), and the cash spot price ($11.80), and the June contract ($21.77) point at some serious forced selling and a complete blowup in the May contracts.

It seems some oil trading firms and hedge funds were caught on the wrong side of heavily leveraged bets, and couldn’t roll over their contracts due to a liquidity crunch and horrible market conditions in that space. But if they can’t sell the contracts by tomorrow, they’ll have to take delivery of the physical oil at the delivery point for NYMEX futures, namely in Cushing, Oklahoma.

The delivery time is in May. But storage in Cushing for May seems to have been spoken for, and now these traders see that they have no place to go with this oil that they might have to take delivery of in May.

But the market for the May contract today essentially collapsed, as potential buyers faced the same problem. And so in their desperate efforts to get rid of the contracts so they wouldn’t end up with the oil that they couldn’t physically handle, these speculators paid a heavy price.

Over the next couple of days, we’ll probably learn who some of those exploded-imploded players might have been. Meanwhile this is a moment for historic reflection and head-shaking.

“I don’t think we’ll have a long-lasting Great Depression…. But we may have a different kind of a mess. All this money-printing may start bothering us.” Read... Munger: “Nobody Knows What’s Going to Happen.” And This Time, Berkshire Is Not Piling into Stocks & Companies

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April 20th, 2020

Posted In: Wolf Street

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