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Negative oil prices? It 's the contract specs, stupid. - Blame CME for the nonsense.
Of course there are no negative oil prices. The so-called negative price only became reality in a meaningless inland depot in Cushing, Oklahoma. Those who were hurt were speculators holding a long position and who did not manage to roll their long positions to the new contract month in time. They were punished.
When talking about oil prices, we would first talk about physical oil. Price for physical oil is subject to supply and demand. The price of physical oil is reported by specialized companies, who follow all transactions that took place in a liquid market. For example in North Western Europe, you would look at the seaports of Amsterdam, Rottedam amd Antwerp (ARA). The quotation is Platt's Cargo CIF High. To obtain the daily prices you would have to subscribe to a daily bulletin. You may compare this to LIBOR or EURIBOR interest rates, which are averaged rates taken from different banks.
The information about the physical oil market is difficult to access, therefore people look at the futures markets instead. There are two highly liquid futures contracts, one is Brent Oil traded at ICE, the other is WTI Oil traded at NYMEX. Now futures contracts have an expiry and a delivery date. Physical delivery of oil futures is needed to connect them to the physical oil market. When the delivery date approaches, futures prices thus converge with the price of physical oil. This works perfectly, if you connect the futures contract to the proper market place. And here comes the problem.
Excerpt from contract specifications for delivery
WTI crude futures(CME): "Delivery shall be made free-on-board ("F.O.B.") at any pipeline or storage facility in Cushing, Oklahoma with pipeline access to Enterprise, Cushing storage or Enbridge, Cushing storage."
Heating Oil futures(CME): Delivery shall be made free-on-board (“F.O.B.”) seller's ex-shore facility in New York Harbor with all duties, entitlements, taxes, fees and other charges imposed prior to, or as a result of, delivery paid by the seller.
Gasoline futures (CME): Delivery shall be made free-on-board (“F.O.B.”) sellers ex-shore facility in New York Harbor with all duties, entitlements, taxes, fees and other charges imposed prior to, or as a result of, delivery paid by the seller.
Gasoil futures (ICE): Contracts are for the future delivery of low sulphur gasoil from the seller to the buyer into barge (or coaster up to 10,000 dwt) or by in-tank or inter-tank transfer from an Exchange Recognised Customs and Excise bonded storage installation or refinery in the Amsterdam, Rotterdam, Antwerp (ARA) area (including Flushing and Ghent) nominated by the seller and on a day nominated by the buyer within a mutually agreed 5 day delivery range between the 16th and the last calendar day of the delivery month
Not mentioning ICE Brent oil here, because settlement is EFP with optional cash settlement and it is a little more complex to explain.
The WTI Crude Contract (CME) is a freak contract
If you look at the above contracts for energy futures, they are all connected to highly liquid market, all ports with a lot of different storage facilities and nearby refineries. However, there is one contract which is deliverable at a pipeline depot in the middle of nowhere, somewhere in the MiddleWest. This is just a miscarriage. Cushing Oklahoma is not a liquid market, but it is controlled by a few storage and pipeline operators. Physical oil prices in Cushing are not representative for the worlds crude oil markets.
When the contract approaches expiry, some of the speculators may decide to roll their positions, still waiting for a better price. And they are getting trapped. In the past there have been magnificent short squeezes in WTI, with price spikes of about 30 - 40 USD a few days prior to expiry. During a short squeeze those holding a speculative short position have to buy physical oil to prepare for delivery. On the other side the few who own the physical oil in the pipeline depot are laughing loud, while the prices are rising. For those who hold the short positions, it is next to impossible to deliver. How would they ship oil to Cushing Oklahoma? Barges can't go there. Trucks and helicopters are not admitted. The pipeline is scheduled weeks or months ahead. They can't bring in the oil and have to pay the price which is being called.
The current situation is just the opposite. Long speculators are being forced into taking delivery of physical oil which they can neither store nor ship. The storage tanks are full and the speculators neither have storage capacity nor access to the pipelines. Those who have contracted the storage space and the pipelines are laughing loud and counting their gains. The long speculators have to pay them to take awy the excess product. Call it a long squeeze.
What does the long squeeze have in common with world oil prices?
Basically nothing. It is just an indicator showing that there is oversupply in Cushing. The WTI crude contract is an anachronism and the front month does not represent real oil prices. If CME would finally allow for delivery of crude at a real market place, not limiting delivery of to a hidden inland depot, trapped long position holders would be able to store or ship the physical product, not being forced into paying the Cushing oligopoly to relieve them from their pain. Negative prices would then be history.
Looks like the CFTC is a lame tiger not properly controlling the industry. What are games good for between speculators and operators?
Please compare to the other futures contracts. Delivery place for most of the other oil futures is a liquid market with significant supply and demand. You won't ever see similar short or long squeezes in those contracts.
Conclusion
If you hold a position in a freak contract such as CL, do not hold it until close to expiry, but roll it early!
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals, U308 and Crypto.
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I was waiting for your conclusion to be make it financially settled like so many Twitter-heads are saying. Thankfully you didn't and I agree with you.
WTI or Cushing used to be one of the most important crude locations in the world. It represented the cost of crude to supply the heartland of America. WTI was often the most expensive crude in the world and priced somewhere close to Brent + Freight + Pipeline fees. Now it's a land locked storage facility with more production than the area can handle.
The problem is it's become a financial benchmark that every interest rate, equity, fund manager in the world watches. No where is this more evident than comparing the volume of CL traded vs the volume of Brent traded. It dwarves Brent and Brent truely is the World Benchmark. Prices for crude on the East Coast and Gulf Coast (which is where most of the refineries are and is why Padd 3 is multiples the size of Padd 2) correlate higher to Brent as that's what they compete with. Pipelines from Cushing to the USGC have been at capacity for years. The problem is made worse by ICEs exorbitant data fees that make trading Brent difficult for the small retail trader.
CME are in a difficult position. Difficult for them to modify the contract significantly and if they do try and launch a new contract to replace it the chance of success is very limited. Probably worth noting that Brent no longer actually represents Brent! ICE have modified that contract multiple times to keep it relevant.
I'm curious what your suggestion for a liquid point would be. You believe that the product terminals at New York harbor aren't also an oligopoly? NG traders have seen negative pricing in GDD before; it would not surprise me at all if we see Argus/Platts with negative pricing soon. Storage constraints aren't just a Cushing problem.
Sure, but that's starting to describe a lot of oil hubs right now. My point was that Argus/Platts are not immune to negative prices; you can't solely blame CME for this and say that survey pricing would resolve this. What location in the U.S. wouldn't be constrained right now if it was made the most active point for U.S. delivery? If you start reducing true fungibility in order to increase liquidity you might as well just offer the option to cash settle (looking at you Brent).
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals, U308 and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,083 since Dec 2013
Thanks Given: 4,429
Thanks Received: 10,274
Ohh then I agree. Which is why I think making CL settlement negative wouldn't solve the problem. It may reduce the 'squeeze' but it could still go negative.
Didn't realize you were talking about different contracts in the second paragraph. "Mini" threw me a bit too, since the WTI contract with which I am familiar is the full 1,000 Brl. Thanks.
