LESS THAN ZERO
Unlike paper assets which can fall to zero, for example equities of companies approaching bankruptcy, commodities are real assets with a real sense of value, so are never going to be worthless.
That was the accepted thinking before April, when a perfect storm of regular supply / plummeting demand / lack of storage and heavy speculative length on the front contract caused May 2020 WTI to drop to a low of minus $40/bbl.
With delivery against the May contract determined by close of business on 21 April, WTI futures longs could not store the remaining physical length so were forced to roll their May positions into June, with the contango suggesting a hefty penalty was paid to defer delivery.
Chart 1 shows front month and second month WTI daily low prices (left scale), and the premium of m2 over m1 (red line, +ve is contango, on the right scale) from 6 March to 27 May 2020.
Unable to take delivery ahead of the 21 April cut-off, remaining longs dumped their May positions, which drove down the price to minus $40/ bbl on 20 April, with the June contract at a low of $20.19/bbl on that date, a differential of $60/bbl basis both low prices (right scale).
On 21 April, the last trading day for May, it traded to a low of minus $16.74/bbl against a low of plus $6.50/bbl for June, a differential of $23/ bbl basis both lows.
The price drop caught out some trading systems not configured for negative prices, with reports that customers of Interactive Brokers were buying May WTI at $0.01/bbl when the actual price was trading well below zero, with the company promising to cover their losses.
Chart 1: WTI US$/bbI - 6 March 2020 - 27 May 2020
Source: Reuters / ADMISI
24 | ADMISI - The Ghost In The Machine | Q2 Edition
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