A thread on -
What led to the fall?
How does it help India?
What is the Correlation between Brent and WTI?

The WTI crude is a particular quality of crude oil in the US that is traded in the markets like other stocks and commodities. Just like other commodities there are various expiry contracts like a May expiry, June expiry and so on for various future months.

The contract states that anyone who bought the contract and holds till the expiry needs to actually take the delivery of the crude at a place called Cushing in Oklahama which is basically the hub/ market for oil. Vice-verca for the seller of the contract.

The case in hand is the May expiry crude price which has settled negative $37/bbl. In simple terms the contract means that anyone who holds the contract promises to buy the crude at Cushing.

Now the situation that has occurred is that there are some participants (traders/refiners/oil producers) who will either have actual physical oil with them during May month or had taken speculative position. Now they dont need it for whatever reason.

In a usual scenario, they would have escaped easily by selling the contract in the market but these are unique times. With the Covid 19 pandemic taking away more than 25% of oil demand currently, their is a huge surplus of oil in the US.

Refiners have filled their capacity, airlines dont need it and producers cant suddently switch off the tap. This had led to a big jump in crude storage at Cushing. With recent developments there is an estimate that storage might be filled totally by May mid.

So then, what does the buyer (usually a Refiner/ airline) of the May contract do? Usually he would have bought and either used it or kept at Cushing or his own storage to use it later on?

But Cushing is likely to be full. Other option usually is to take it out through a pipeline to the shore and keep it in a vessel and use it when demand is there.

Well uniquely again, because of the glut, the pipelines which were taking the crude have reversed the flow and getting the crude in to Cushing. On top of it, even if you get the crude out to the shore, the vessels have already been booked and are simply not available.

So what does a holder of a contract do? Lets say if he is a trader? He certainly cant take the actual delivery. So he will sell it at whatever price - even negative. If indeed the inventories are full, the buyer will perhaps take the delivery and store it in truck tanks perhaps

@safiranand @Amena__Bakr #oil #OilPrice