NYMEX WTI futures trade below zero

On April 20, 2020, the front month futures price in the highest volume crude oil futures contract in the world traded below zero. 
Having fallen consistently over the prior 20 hours, shortly after 2:00 p.m. the NYMEX WTI price plunged, leading to a settlement price for the day at -$37.63. It was a remarkable event not just because of the hens teeth-like rarity of negative prices in any physical commodity futures contracts but also because it implied an underlying market for crude oil where sellers would pay buyers to take crude oil off their hands. 
== Market events == 
The information in this section is drawn from the U.S. Commodity Futures Trading Commission's "Interim Staff Report Trading in NYMEX WTI Crude Oil Futures Contract Leading up to, on, and around April 20, 2020."
=== Price action in May futures ===
The May 2020 contract in the NYMEX WTI futures opened at $17.73 per barrel on its second to last day of trading. That unusual trading day began at 6:00 p.m., New York time, on Sunday April 19, 2020. Overnight and the next day, the price of the May futures fell. All trades that day had positive prices until at about 2:08 p.m. as traded prices first turned negative. Then transaction prices plunged, falling as low as -$40.32 at 2:29 p.m. That was $58.05 per barrel lower than the trading day's opening price. 
Like other CME futures contracts, the May 2020 NYMEX WTI futures contract was subject to dynamic circuit breakers that pause trading in a futures contract. Dynamic circuit breakers halt trading in the affected contract month for two minutes. The trading system began invoking circuit breakers starting before 1:00 p.m. and continuing the rest of the day. A total of more than 30 trading pauses were used on April 20. 
Prices in the front month contract did not rise above zero again until shortly after 8:00 p.m. on April 20, 2020. The April 21 trading session, the last trading day in the expiring May contract, began at 6:00 p.m. on April 21. 
The daily settlement price for crude oil futures contracts at the CME is based on all trades during the period between 2:28 and 2:30 in the front month. In this case, because April 20 was the next to last trading day in the expiring month, May was no longer considered the front month and its prices were not used for the settlement price calculation. Trading in the next month’s contract, June 2020, provided the base data for all of the settlement prices in NYMEX WTI futures, including the April 2020 futures, which were calculated at the spread observed by CME staff between June 2020 traded prices and each other contract month for that contract month’s settlement price. Accordingly, the settlement price of the May Contract reflected the spread between the May Contract and the more actively traded June 2020 contract. CME set the spread between those two months at -$58.06 per barrel, a record level for a nearby month spread in NYMEX WTI futures. 
The April 21 trading session, which was the last day of trading for the May contract, began at 6:00 p.m. on the 20th. session. Shortly after 8:00 p.m. the May NYMEX WTI contract again traded above $0 per barrel. That was.about six hours after prices first dropped to negative levels. 
May futures prices fell back below zero again as the European markets opened. They hovered near zero until around 9:00 when U.S. markets opened on April 21. Futures prices remained positive until the contract finally settled on April 21 at a price of $10.01 per barrel.
=== June futures prices === 
On April 20 and 21, the prices of the June futures contract largely decoupled from the May futures contract. At around 2:30 p.m. on April 20, about when daily settlement prices were set by the CME Group, the difference between the prices of the two contract months was -$58.05. The spread between the contracts at expiration was -$1.56, reportedly in line with recently observed levels.
=== May futures open interest ===
The May 2020 contract opened the April 20 trading session with an open interest of 108,593 contracts. According to the CFTC's Interim Staff Report, “Relative to recent prior contract months, the amount of OI was significantly higher at the start of the April 20 trading session.” Almost 97% of the short open interest in that contract was held by “large traders,” traders holding 350 or more contracts in any one NYMEX WTI futures contract month - not just in the May 2020 futures. The number of short positions held by non-reportable traders was 3,329 at the start of trading in the May 2020 contract on April 19. 
The unusually large overhang of open interest on April 20 largely dissolved that day as open interest fell by about 95,000 contracts by the end of the trading day.
=== Exchange information === 
While, as discussed below, oil traders and oil industry participants were considering the possibility of negative prices in crude oil and other energy contracts in mid April 2020, the CME Group's only statements on the developing situation seem to have been technical notices to its clearing members and later to some trading members. 
The CME Group’s Clearing Division sent a notice on April 8 to “Clearing Member Firms, Chief Financial Officers, Back Office Managers” saying that the division would provide one day’s notice if the exchange were to list negative strike prices in certain energy contracts so clearing members would have time to switch their internal pricing models to the Bachelier model, an options pricing model. The notice also said, “Please note that all existing CME Clearing message and file formats already support, without modification, negative futures prices as well as negative strike prices.” (Such pricing models are used only for risk management of options contracts and do not affect futures pricing.) 
On April 13, the CME Group issued a Globex notice inviting users to use its new release testing environment to explore potential negative prices. Two days later the Clearing Division issued an advisory to its clearing members about using the testing opportunities in the new release environment. Finally, on April 20, the CME Global Command Center informed NYMEX trading members that prices could trade negative, that is, they would have no lower price limit. 
On April 21, 2020, as the May futures settled finally at prices well within positive territory, the CME Clearing Division published Advisory 20-171 announcing that effective for the margin cycle at the end of trading on April 22 the options pricing and valuation model would switch to the Bachelier model. 
=== Bachelier model ===
The Bachelier options pricing model grew out of a 1900 dissertation by Louis Bachelier called Theorie de la Speculation which introduced the idea of what later became known as "Brownian motion." Many option pricing models use such modeling but one of the key features of Bachelier's formulation was that it uses non-logorhithmic numbering and thus can accommodate the negative prices that were observed in the crude oil futures contract on April 20. 
== Contemporaneous oil market conditions: “unprecedented” == 
 
=== Demand === 
By April 20, 2020 the state of the world economy was precarious and the oil markets were fraught with fundamental risks. 
The year 2020 started against a backdrop of relatively healthy global economic growth as well as stable crude oil prices; however, unforeseen macroeconomic conditions soon began to exert extraordinary forces on the global petroleum markets that were felt throughout the world in the first and second quarters of 2020. In its first monthly report for the new year, the International Energy Agency said in its January Oil Market Report, “our main headline data for 2020 is largely unchanged from last month. Oil demand growth is forecast to accelerate to 1.2 mb/d, supported partly by prices remaining relatively subdued, higher global GDP growth than last year and by progress in settling trade disputes.”
Referring to the oil market effects of sharply heightened tensions between Iran and the U.S. that occurred in the fourth quarter of 2019, the agency’s report noted, “At the start of 2020 the oil market has again faced a period of geopolitical turmoil at the same time as a significant sector is adjusting to a major change to its operating environment.” Even in January, the brewing global Covid-19 pandemic was off the oil industry’s radar. 
In contrast, just one month later, the same organizations’s February report said, “Global oil demand has been hit hard by the novel coronavirus (Covid-19) and the widespread shutdown of China’s economy. Demand is now expected to fall . . .” 
No corner of the world’s economies would be unaffected by the Covid-19 pandemic in the first half of the year. In fact, the Organization of Economic Cooperation and Development reported that after widespread mild downturns in the first quarter across its member countries, gross domestic product declined 10.9% the second quarter of 2020. The U.S. economy alone declined at an annual rate of 9.5% in the period. 
China’s economy, which was the first national economy to be affected by the public health responses to Covid-19, contracted sharply by 6.8% in the first quarter of 2020 although it was growing again in the second quarter at an annual rate of 2.5%.
=== Supply ===
Late in the afternoon on April 20, with NYMEX WTI futures still trading below zero although up from the -$37.63 settlement price set earlier in the afternoon, the Wall Street Journal reported this quote from an unidentified Saudi Arabian official: ““Something has to be done about this bloodbath, but it might be a little bit too late.” 
The background to the Saudi’s statement was a struggle between Organization Petroleum Exporting Countries (OPEC) members and Russia about reducing oil production in light of the worsening world economy. Saudi Arabia, the largest producer in OPEC, had engaged in a brief price war against Russia in February and March when the latter country reneged on pledges to reduce output. 
In the week ending April 10, the federal U.S. Energy Information Administration, said that crude oil inventories had expanded by a record of more than 19 million barrels that week and that gasoline storage had increased to a record of 262.2 million barrels although refining activity was at 12-year low levels. 
On April 12 U.S. President Donald Trump announced that he had successfully brokered a deal between OPEC and Russia that would result in a reduction of daily oil production by 9.7 million barrels per day, about 10% from then current production levels. Demand had fallen by about 35% at the time. The cuts were to be fully implemented starting in May, leaving already glutted oil markets to deal with continued massive over- production of crude oil. 
Already within a few days of the agreement, the media were reporting on widespread concerns in the industry as well as among crude oil traders. The subtitle of a Wall Street Journal article stated presciently, “Traders of physical barrels of crude brace for the possibility of negative pricing; traders of energy derivatives also wary.” That article was published on April 15, five days before NYMEX WTI futures price turned negative. 
=== Effects on cash markets ===
 
Although negative oil prices were not widespread on Monday, April 20, Bloomberg reported a few instances of negative prices that day. For example, the price for WTI oil in Midland, Texas, was -$13.13 per barrel along with negative prices at other locations in the region. Bloomberg also reported Alaska North slope at -$46.43, although some other grades and other locations were priced low, but above zero, that day. 
Reuters reported that Mexican exports were also hit hard. On April 20, Mexican oil for delivery at the Port of Houston was priced at $27.50 per barrel above the NYMEX WTI futures settlement price, keeping it firmly below zero. Overall, Pemex, the Mexican state-owned oil company, reported that its export basket of oil closed at a negative level that day for the first time ever.
== NYMEX WTI contract description ==
The NYMEX WTI futures contract is formally known as “light sweet crude oil” futures. The contract is also known as “crude oil” futures,” “WTI” futures, and “NYMEX WTI” futures. NYMEX refers to the legacy marketplace, NYMEX (New York Mercantile Exchange), which first listed crude oil futures in 1983. CME Group has owned and operated NYMEX since 2008. 
=== Critical elements of NYMEX WTI contract design ===
Two key features of the NYMEX WTI futures contract gave rise to the extraordinary developments in contract pricing on April 20, 2020: 1) the contract requires delivery on all contracts open at the end of trading on the last day of trading, a factor that leads to mostly excluding non-oil industry professionals from the delivery process and 2) there is a single delivery location for the contract, the pipelines and connected storage facilities at Cushing, Oklahoma. 
=== Contract terms === 
One futures contract represents 1,000 barrels of oil. The price is quoted as dollars and cents per barrel with a minimum price fluctuation of $.01 (one cent) per barrel.
While NYMEX WTI futures is a physically deliverable contract, meaning that futures contracts that are open at expiration in a contract month must be settled by the futures contract seller delivering oil to the futures contract buyer or through an “exchange for risk position,” a mechanism generally not available to members of the public.
The quality specifications for crude oil delivered on the futures require the grade of crude oil known in the energy business as West Texas Intermediate or “WTI.” WTI denotes high-quality, low-sulphur petroleum that is easily refined into gasoline. 
The contract’s single delivery point includes pipeline or storage facilities with pipeline access in Cushing, Oklahoma.
=== Futures trading conditions ===
The contract trades electronically on the CME Group’s Globex system. NYMEX WTI futures trade 23 hours per day, from 6:00 p.m., New York time, to 5:00 p.m. the next day, five days per week, starting Sunday evening and ending late Friday afternoon. There are contracts listed for delivery every month at least 10 years into the future. 
The daily settlement price used by the clearing house to mark positions to market is based on prices in the front calendar month during trading between 2:28 and 2:30 p.m. each trading day. Two days before a contract expires, it is no longer considered to be the front delivery month; the next-to-expire contract becomes the front month two days before the previous contract ceases trading.
The last day of trading in an expiring month is three days prior to the 25th calendar day of the month. 
== References ==
Categories:Crude Oil
Category:CME Group Contracts
Category:NYMEX