The Negative Pricing of the May 2020 WTI Contract

Adrian, Fernandez-Perez and Ana-Maria, Fuertes and Joelle, Miffre (2022): The Negative Pricing of the May 2020 WTI Contract. Forthcoming in: The Energy Journal

Abstract

This paper sheds light on the negative pricing of the May 2020 WTI futures contract (CLK20) on April 20, 2020. The super contango of early 2020, triggered by COVID-19 lockdowns and geopolitical tensions, incentivized cash and carry (C&C) traders to be long CLK20 and short distant contracts, while simultaneously booking storage at Cushing. Our investigation reveals that C&C arbitrage largely contributed to the lack of storage capacity at Cushing in April 2020 and the price crash relates to the reversing trades of many long CLK20 traders without pre-booked storage. Additional aggravating factors included a liquidity crush, staggering margin calls and potential price distortions due to the trade-at-settlement mechanism. The analysis suggests that claims from experts that hold index trackers responsible for the crash are unwarranted: Index trackers did not trigger the negative pricing, nor widen the futures-spot spread by rolling their positions to more distant contracts ahead of maturity.

• Item Type: MPRA Paper
• Language: English
• Keywords: WTI crude oil futures contract; Negative price; Contango; Cash and carry; Index trackers; Disinformation
• Subjects: G - Financial Economics > G1 - General Financial Markets; G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing ; Futures Pricing; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q4 - Energy

References

REFERENCES

Ahmadi, M., N. Bashiri Behmiri and M. Manera (2020). “The Theory of Storage in the Crude Oil Futures Market, The Role of Financial Conditions.” Journal of Futures Markets 40: 1160-1175.

Algieri, B. and A. Leccadito (2019). “Price Volatility and Speculative Activities in Futures Commodity Markets: A Combination of Combinations of P-Values Test.” Journal of Commodity Markets 13, 40-54.

Alquist, R., R. Ellwanger and J. Jin (2020). “The Effect of Oil Price Shocks on Asset Markets from Oil Inventory News.” Journal of Futures Markets 40: 1212-1230.

Anderson, R. and J.-P. Danthine (1983). “Hedger Diversity in Futures Markets.” Economic Journal 93: 370-389.

Aruoba, S.B., F. X. Diebold and C. Scotti (2009). “Real Time Measurement of Business Conditions.” Journal of Business and Economic Statistics 27: 417-27.

Bakas, D. and A. Triantafyllou (2020). “Commodity Price Volatility and the Economic Uncertainty of Pandemics.” Economics Letters 109283.

Baker, S. R., N. Bloom and S. J. Davis (2016). “Measuring Economic Policy Uncertainty.” The Quarterly Journal of Economics 131: 1593-1636.

Baker, M. and J. Wurgler (2007). “Investor Sentiment in the Stock Market.” Journal of Economic Perspectives 21: 129-152.

Boons, M. and M. Prado (2019). “Basis Momentum.” Journal of Finance 74: 239-279.

Brennan, M. (1958). “The Supply of Storage.” American Economic Review 48: 50-72.

Brunetti, C., B. Büyükşahin and J. Harris (2016). “Speculators, Prices, and market Volatility.” Journal of Financial and Quantitative Analysis 51: 1545-1574.

Büyükşahin, B. and J. Harris (2011). “Do Speculators Drive Crude Oil Futures Prices?” Energy Journal 32: 167-202.

Chordia, T., R. Roll and A. Subrahmanyam (2001). “Market Liquidity and Trading Activity.” Journal of Finance 56: 501–530.

CFTC’s Interim report, November 2020 (11/23/2020). www.cftc.gov/PressRoom/Press Releases

Da, Z., J. Engelberg and P. Gao (2015). “The Sum of All FEARS Investor Sentiment and Asset Prices.” Review of Financial Studies 28: 1-32.

Danielsson, J., M. Valenzuela and I. Zer (2018). “Learning from History: Volatility and Financial Crises.” Review of Financial Studies 31: 2774-2805.

Davis, A. (2007). “Where Has All the Oil Gone?” Wall Street Journal Oct. 6, 2007.

Ederington, L., C. Fernando, K. Holland, T. Lee and S. Linn (2021). “Dynamics of Arbitrage.” Journal of Financial and Quantitative Analysis 56: 1350 - 1380.

Enders, W. (1995). Applied Econometric Time Series. John Wiley and Sons, New York, NY.

Erb, C. and C. Harvey (2006). “The Strategic and Tactical Value of Commodity Futures.” Financial Analysts Journal 62: 69-97.

Fattouh, B., L. Kilian and L. Mahadeva (2013). “The Role of Speculation in Oil Markets: What Have We Learned So Far?” Energy Journal 34: 7-33.

Gao, L. and S. Süss (2015). “Market Sentiment in Commodity Futures Returns.” Journal of Empirical Finance 33: 84-103.

Geman, H. and S. Ohana (2009). “Forward Curves, Scarcity and Price Volatility in Oil and Natural Gas Markets.” Energy Economics 31: 576-85.

Geman, H. and W. Smith (2013). “Theory of Storage, Inventory and Volatility in the LME Base Metals.” Resources Policy 38: 18-28.

Gorton, G., F. Hayashi and G. Rouwenhorst (2013). “The Fundamentals of Commodity Futures Returns.” Review of Finance 17: 35-105.

Gorton, G. and G. Rouwenhorst (2006). “Facts and Fantasies about Commodity Futures.” Financial Analysts Journal 62: 47-68.

Gu, M., W. Kang, D. Lou and K. Tang (2019). “Relative Basis and Risk Premia in Commodity Futures Markets.” SSRN working paper No. 3404561.

Hamilton, J. and J. Wu (2015). “Effects of Index-Fund Investing on Commodity Futures Prices.” International Economic Review 56: 187-205.

Im, K. S., M. H. Pesaran and Y. Shin (2003). “Testing for Unit Roots in Heterogeneous Panels.” Journal of Econometrics 115: 53-74.

Irwin, S. and D. Sanders (2012). “Testing the Masters Hypothesis in Commodity Futures Markets.” Energy Economics 34: 256-269.

Kaldor, N. (1939). “Speculation and Economic Stability.” Review of Economic Studies 7: 1-27.

Kilian, L. (2016). “The Impact of the Shale Oil Revolution on U.S. Oil and Gas Prices.” Review of Environmental and Economic Policy 10: 185-205.

Levin A, C.F. Lin and J. Chu (2002). “Unit Root Test in Panel Data: Asymptotic and Finite Sample Properties.” Journal of Econometrics 108: 1-24.

Minsky, H. P. (1977). “Banking and a Fragile Financial Environment.” Journal of Portfolio Management 3: 16-22.

Moskowitz, T.J., Y. H. Ooi and L. H. Pedersen (2012). “Time Series Momentum.” Journal of Financial Economics 104: 228-250.

Miffre, J. and G. Rallis (2007). “Momentum Strategies in Commodity Futures Markets.” Journal of Banking and Finance 31: 1863-1886.

Nagy, A.S. and R.C. Merton (2020). “Negative WTI Crude Futures Prices Event Study, MTI GCFP, https://gcfp.mit.edu/negative-wti-crude-futures-prices-event-study/.”

Pindyck, R. S. (2004). “Volatility and Commodity Price Dynamics.” Journal of Futures Markets 24: 1029-1047.

Singleton, K. (2014). “Investor Flows and the 2008 Boom/Bust in Oil Prices.” Management Science 60: 300-318.

Stulz, R. (1996). “Rethinking Risk Management.” Journal of Applied Corporate Finance 9: 8-24.

Symeonidis, L., M. Prokopczuk, C. Brooks and E. Lazar (2012). “Futures Basis, Inventory and Commodity Price Volatility: An Empirical Analysis.” Economic Modelling 29: 2651-2663.

Stancu, A., L. Symeonidis, C. Wese Simen and L. Zhao (2021). “The Dynamics of Storage Costs.” Working paper.

Till, H. (2009). “Has There Been Excessive Speculation in the U.S. Oil Futures Markets?” EDHEC-Risk Institute research paper.

Wimmer, T., J. Geyer-Klingeberg, M. Hütter, F. Schmid and A. Rathgeber (2021). “The Impact of Speculation on Commodity Prices: A Meta-Granger Analysis.” Journal of Commodity Markets 22: 100148.

Working, H. (1949). “The Theory of Price of Storage.” American Economic Review 39: 1254-1262.