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Published on 21/04/2020 4:01:31 PM | Source: HDFC Securities Ltd

The outlook on crude oil prices by Mr. Tapan Patel, HDFC Securities

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Below is the Views the outlook on crude oil prices by Mr. Tapan Patel- Senior Analyst (Commodities), HDFC Securities

The NYMEX WTI Crude oil prices have turned negative on Monday reporting a historic movement in the oil market. This happens when a physical futures contract find no buyers close to or at expiry as supply exceeds demand.

* A physical contract of NYMEX WTI has a delivery point at Cushing, Oklahoma with an expiry date. The future contract for May delivery has expiry in 21 April 2020. So people who hold the contract at the end of future settlement have to take physical delivery of the oil contract they bought on the futures market.

* At present, traders or speculators who had bought the contract are finding themselves unable to resell it, and have no storage booked to get delivered the crude in Cushing, where the delivery is specified in the contract. This means that all the storage in Cushing is booked, and there is no price they can pay to store it. The selloff in the May contract came due to the contract roll and liquidity crunch.

* The selloff in May contract indicates that physical oil markets at Cushing are in bad shape and that storage is getting very full. The contract holders took the hit on the prices as taking delivery was become costly.  The negative prices indicates that the physical contract holders are ready to pay extra to take delivery off their hands.

* However, it doesn't necessarily represent futures market conditions: NYMEX June is trading near $20. So recent fall and negative prices are the reflection of dire physical market conditions.

 

 

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