Just five years ago, in full Covid-19 pandemic, one of the strangest days in oil history was lived. The confinements that were decreed throughout the world ended up creating an unprecedented situation in the crude oil market. The American regulation, combined with an oil oversu West Texasthe reference in the United States, quote negative prices. Pandemia created a precedent that has not been repeated again, but that does not mean that it cannot happen again, if market stars align again.
On Monday, April 20, 2020, world markets started a new week, in the dystopic year of the Covid-19 pandemic. Many investors dawned that week cured of fright, accustomed to seeing the price of oil falling in recent weeks, and oil started on Monday in the United States in the around $ 18 per barrel, a very low price if compared to the past, but which fit into a situation of total economic break throughout the world, for confinements. However, what was going to happen later, throughout that session, would be marked in the memory of the operators who lived it: the price of crude oil began to collapse, and it approached dangerously at 0: 10 dollars, 5 dollars … 1 dollar, 1 cent … and suddenly, -1 dollar? -10 dollars? -40 dollars? The panic was served.
For many investors, what had just happened made no sense or logical. How could it be that the oil costs less than 0 dollars the barrel? What meant the fall that had just produced? Little by little, the situation was deciphering and the reason for the sinking of the price of crude to those historical levels, something unprecedented and that has not been repeated since then has been understood.
The cause of negative prices: the delivery of physical barrels to speculative investors
The main reason that led to negative prices in oil, in 2020, was the supply and demand equation. That year the world was locked at home to avoid the infections of Covid-19, and the oil demand sank like never before. However, the production, although less, continued to fill raw barrels in the world, and an oversupply situation that sank the barrel prices was generated.
So far, everything seemed to fit with the exceptionality of pandemic, and explained the reason for the low prices that had been achieved, but there were some factors that made the West Texasand not the rest of the Petroleum Barriles of the APAA, ended up quoting in negative prices. The main one was the particular way in which the NYMEX, the United States raw material market, liquidated future contracts on oil.
Futures on a raw material had become the reference prices in the market, ahead of cash prices, due to the enormous volume they received. After all, these contracts are the basis of speculation operations that multiply throughout the world, and are those used by investors who want to invest in a price trend of a basic resource, without having to buy it physical and store it for subsequent sale, a much more cumbersome operation. The best example of this is the market that exists of physical gold, compared to gold paper, the latter, with much more volume than the first.
The problem in the 2020 crisis was that Nymex liquidates future contracts in a special way: when a future reaches its expiration, it is established that the contract is liquidated with a physical delivery of the underlying, that is, of the royal barrels that represent the future contracts in which they have been invested. The owners of that contract have a period of several days to indicate how and where they want to receive their merchandise, and this generated a problem at that time: the warehouse where barrels are kept for those operators who do not find a buyer, that of Cushing, in Oklahoma, was full to the stops.
This planted a serious problem: without a single hole in Cushing, what could a Hedge Fund in New York, or California do, when asked where he wanted to receive his barrels of oil? Besides, They were not small amounts, taking into account that each future contract on oil represents 1,000 barrels, about 170 tons of oilthat they had to keep somewhere.
Leaving this oil in an unknown place was not a possibility, or at least, it was not without a tremendous risk, taking into account the safety demands that are maintained in the United States, with laws such as oil pollution (oil pollution act), 1990. Tiring the crude ‘by the toilet’ was discarded.
Therefore, one day before thousands of millions of dollars in futures were expired, investors went into total panic and began to throw prices down. When many of them realized that giving away their barrels was not enough to get out of this situation in which they had gotten, they began to pay who were willing to take care of that cargo. Store it, or even get rid of it, had a cost, and hence it was paid up to 40 dollars per barrel of West Texas who wanted to buy them.
A crisis that can happen again
After that episode, it was raised what could be done to prevent this could occur in the future, but No fundamental changes were made in the way of liquidating contracts by Nymexsomething that, in other markets, such as the European, was different: the liquidation is usually produced by price differences, exchanging between the buyer and seller of the contract the price difference that has been sold since it has sold, until it is settled.
Therefore, in the case of the barrel Brent European, prices did not fall to the negative field in April 2020, but remained around $ 30 per barrel during that day.
CME Group, owner of the New York raw material market, adjusted its systems so that there were no technical problems in the future, if this happened again, but maintained the form of liquidation of future contracts, so there is still the possibility that the fall in the price of the price of the price of West Texas Even the negative terrain happens again.
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