Some thoughts on negative oil price

[traderDS]

You seem like you’re placing the blame on NYMEX. Retail speculators have the responsibility to: 1. Understand their broker’s last trading day policy and position liquidation policy for the particular instruments they are trading, and 2. Understand the delivery and settlement specifications for the particular instruments they are trading.

I totally agree with you those speculators are tasting bitter pill made by themselves. Specially, it seems that traders of Bank of China, the biggest loser of -40$, are really morons. They are professional traders and they are clear that they're not able to do the physical delivery, but they made such a huge mistake. They exposed their vulnerable back to their rivals. Even worse, they were selling other postions in a hurry and flurry second day and caused a second earthquake to the market. I'm not blaming NYMEX. Anyway, the game was carrying on under the the public rules.

What really interests me is how WTI ecosystem, as well as the front-month contract, will be impacted by this negative price. Speculators, merchants, producers, the exchange, all of them are members of this ecosystem. Now that speculators are doubting the pricing authority of WTI and they may step out of this market, how would the exchange reflect?

 

[bone]

There will be no more such an insane selling for June contract.

June is in very severe Contango versus the balance of the forward curve in crude oil. Has been since May went off the board. You seem very sure of yourself, however. I've been trading Oil and Distillates for well over 20 years and I do not share your 'confidence'. Especially given the massive amounts of stranded crude oil supply at present and the very prescriptive nature of physical delivery for the WTI crude oil contract.

Now that speculators are doubting the pricing authority of WTI and they may step out of this market, how would the exchange reflect?

In my opinion you are really really projecting here.

On April 21st the May contract volume was substantially less than the June contract volume - by a factor of five as I recall. Arguendo - any speculator with an ounce of brain matter would have been trading the June contract just for liquidity's sake. I have not heard from traders that they have 'lost confidence' in the crude oil futures contract. In fact, traded volumes since April 21st have not dropped significantly as compared to previous months.

The other factor you are sidestepping is the personality type of speculator that the crude oil futures attracts in the first place. They are looking for risk. They crave volatility. For every speculator that was scared - there were three that were drawn to that price action. Point being - if you're risk averse, you don't speculate in flat price crude oil futures. Go trade Eurodollars .

 

[themickey]

Bone, are you thinking that oil may do a repeat performance with futures & USO taking a dump toward end of month?

 

[bone]

Bone, are you thinking that oil may do a repeat performance with futures & USO taking a dump toward end of month?

It wouldn't surprise me. We would really need to see a great pick up in demand for finished distillates from refiners and in turn, refiners taking in much greater quantities of crude. And May 19 is the last trading day for the June contract and May 21 is first notice day for the June contract. Do the math.

 

[themickey]

It wouldn't surprise me. We would really need to see a great pick up in demand for finished distillates from refiners and in turn, refiners taking in much greater quantities of crude. And May 19 is the last trading day for the June contract and May 21 is first notice day for the June contract. Do the math.

Thanks for heads up.

 

[bone]

Thanks for heads up.

I'm not saying that the play is to outright short June Crude Oil. Too risky and not really my style.

But I would not argue with being short June CL long Sept CL as a spread, or short June CL long June RBOB as a spread.

 

[ajacobson]

CME Notification today

The procedural payment and related notice obligations of buyers and sellers under Rules 200107.C and 201107.C will be transposed where the Contract expires at a negative final settlement price.

 

[bone]

Translation: just because the price is negative is coincidental - the exchange will still facilitate delivery and settlement. If sellers are paying buyers for the privilege then so be it.

CME Notification today

The procedural payment and related notice obligations of buyers and sellers under Rules 200107.C and 201107.C will be transposed where the Contract expires at a negative final settlement price.

 

[VolSkewTrader]

Front month Jun20 in WTI is up almost 300% from its low of $6.50 two weeks ago. All the hedge funds have loaded up on longer-dated CL expirations and no one in their right mind is going to risk taking physical delivery in front month June if they're not able to. So I don't think negative prices are in the offing for Jun20.

Maybe a second more deadly wave and another lockdown later this year will give the shorts the negative prices they're hoping for.

 

[ajacobson]

What was institutional spot when the May contract went off at -$40?