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Historically rarely negative oil prices

The US Commodity Futures Trading Commission (CFTC) recently released an investigation report on the “negative oil price” incident in April this year. The report revealed that the “negative oil price” incident was caused by a variety of factors including fundamental factors and technical aspects, including oil Oversupply in the city, reduced demand due to the epidemic, and uncertainty in supply and demand.


Official release of investigation report
Analysis of the “negative oil price” event on April 20
The investigation report released by the US Commodity Futures Trading Commission (CFTC) on November 23, US time shows that on April 20 this year, between 2:08 pm and 2:30 pm Eastern time, the settlement period ended, May crude oil The price of the futures contract fell below $0 per barrel, the first time since the WTI futures contract began in 1983.
On April 20, the May crude oil futures contract hit a new intraday trading low of -40.32 US dollars per barrel, and the final settlement price was -37.63 US dollars per barrel. All other expiring WTI contracts are settled at positive prices on April 20.

The report analyzes the “negative oil price” event from both the fundamentals and the technical aspects of the transaction.
Heath P. Tarbert, Chairman of the U.S. Commodity Futures Trading Commission, said, “This report provides important facts that our market surveillance professionals and economists can share publicly, including detailed information on the use of non-public information and multiple data sources. analysis.”

Fundamental factors and technical factors
Together lead to “negative oil prices”
The CFTC report pointed out that in terms of fundamentals, the “negative oil price” event was mainly due to the global economic slowdown, the new crown epidemic and other factors, as well as the reasons for the storage of crude oil at that time.
The first is the impact of factors such as the global economic slowdown and the new crown pneumonia epidemic. The report believes that the new crown pneumonia epidemic has significantly reduced the demand for crude oil, pushed oil prices down, and pushed 90-day historical price fluctuations of crude oil to extreme levels. From January 2 to February 6 this year, WTI’s contract price steadily dropped from US$61.18/barrel to US$50.95/barrel. By March 2nd, the price of oil had fallen to US$41.28 per barrel.

The CFTC explained in the report that part of the decline in oil prices from January to February may be due to the reduction in demand for crude oil in China and other Asian countries, and partly due to market concerns about the spread of the epidemic.
At the same time, in order to cope with the decline in demand, OPEC+’s differences in reaching a production reduction agreement further increased the downward pressure on WTI contract prices. Although OPEC+ member states reached a historic agreement later, the initial response of oil prices to OPEC’s announcement of a production cut was flat, and WTI contract prices continued to fall. CFTC believes that this is because the production cut plan will not start until May 1. With short-term global demand weakened by the epidemic, the crude oil market is still in a state of unrestricted production.
The second fundamental factor leading to “negative oil prices” comes from crude oil storage. The report pointed out that the new crown pneumonia epidemic has sharply reduced the demand for the global crude oil market, which is already oversupply. Although OPEC+ has reached an agreement to reduce crude oil supply, the production cut is not expected to begin until May 2020. Therefore, in the short term, concerns about oversupply of crude oil production and insufficient supply of crude oil storage capacity continue to increase.

The report believes that the crude oil industry’s demand response to the new crown pneumonia is faster than the supply response, causing the problem of oversupply in the crude oil market to intensify. With the global economic slowdown, the consumption of refined oil and crude oil has fallen rapidly, and efforts to cut production have lagged behind the sharp decline in demand. This led to a rise in spot oil inventories, which pushed down the price of crude oil in recent months. At the same time, the expectation that demand for crude oil will recover in the future will drive forward price increases. As more oil flows into warehouses, oil prices have fallen further in recent months.
The CFTC concluded in the report that “negative oil prices” are the result of a series of extensive fundamental factors. The oversupply global crude oil market has experienced an unprecedented decline in demand, and uncertainties in scale and duration have pushed market volatility to historical levels. The OPEC + production reduction agreement was lifted in March, and production reduction measures were postponed until May to resume. This further aggravated concerns about oversupply of crude oil, and ultimately raised concerns about the market’s ability to store excess production. These concerns are particularly urgent in the Cushing storage facility, which is the delivery point of the actual delivery contract of WTI.
In addition, the CFTC also analyzed the crude oil futures trading activities at the time in the investigation report, such as the liquidity of the contract and other factors.

Market reaction is cold

However, despite the CFTC announced the results of its investigation into April “negative oil prices”. But the market reacted indifferently to this, mainly because the survey report did not give any more information except for the previously known information.
Previously, Heath P. Tarbert, Chairman of the Commodity Futures Trading Commission, said, “Although some people may wish to make a clearer analysis, we are unable to provide such analysis at this time.” This statement is suspected of doubting whether there is a “negative oil price” event in the market. Market manipulation, but officials declined to comment.
According to media reports, John Kilduff, the founding partner of Again Capital in New York, pointed out: “If they (CFTC) are unwilling to consider or take any protective measures to prevent these problems from recurring, obviously negative oil prices may happen again in the future. “What makes Kilduff even more puzzled is that the CFTC avoids the issue of market manipulation: “Why are they reluctant to say that there is no market manipulation? It is not good for the entire industry to leave this issue unresolved. Even if there is no detailed argument, the CFTC can tell everyone that there is no market operation, which can be reassuring, and it is better than the current processing (avoid talking about it).”

It is worth noting that after the investigation report was released, the CFTC immediately issued two statements from the Commodity Futures Trading Commission members Dan M. Berkovitz and Rostin Behnam.
Rostin Behnam said, “The committee will continue to analyze the events of April 20 to assess whether there are reasons for any changes to the position limit regulations based on the volatility of the WTI contract.”
Dan M. Berkovitz pointed out in the statement that the report previously issued was “incomplete” and “inappropriate”. The statement mentioned that the report failed to determine the reason for the unprecedented drop in WTI futures contract prices. The report only enumerates and provides a summary of the economic conditions in the days (weeks) before the event and the data related to transactions on that day. Unfortunately, this report did not provide the public with a sufficient explanation of the reasons for the price collapse on April 20.

Dan M. Berkovitz added that the committee must fully understand the plunge of WTI crude oil futures on April 20, 2020, and share it with the public as soon as possible. However, for the public, market participants, and small and large companies who rely on reliable crude oil futures benchmarks for contract pricing, risk mitigation and price discovery, the release of incomplete preliminary reports is detrimental to them. The committee should continue to analyze the events of April 20 and provide citizens with a complete and accurate report as soon as possible.
Source: China Fund News (chinafundnews)