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Can Crude Oil Trade Negative on the Exchanges?

ProCapitas

In the Indian context the answer is NO! 


As there is no physical delivery and MCX allows only cash settlement in Crude Oil. Therefore, maximum the contract can expire worthlessly and cannot turn negative.

 

In the American context, where the physical delivery of the Crude Oil exits the answer is Yes!

 

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West Texas Intermediate (WTI) futures for May delivery, which was last traded on Monday, plunged more than 100% to -$37.63 a barrel. 


Remember Oil is a commodity and not a stock, therefore its contract has a delivery date associated with it. Also, note that June delivery contract is still trading above $20 and it is a better reflection of the actual Crude Oil prices as from Tuesday the rates for the Crude Oil will again be $20.



Generally, the spread between the next contract is not more than 40-50 cents per barrels but since we are observing abnormal times this gap has widened by a significant amount as there is no demand in the near future.

 

The negative expiry for the May month future is due to the reason that nobody wants to take physical delivery of the Crude Oil and wants to square off their long position even by paying more.

 

There are number of traders in the market who speculates on the commodities to earn profits rather than taking the actual delivery. Actual buyers are only the entities like refineries, airlines, etc., but as of now even they do not require the Crude Oil due to current circumstances.

  

To summarize, this huge collapse is a mere reflection of the traders who are rolling over their contracts to the next month as they don’t want physical delivery of the Crude Oil. Therefore, it is not wise to say that Crude Oil is being supplied free of cost.


Thanks 

CA Saksham Agarwal

 

 

 

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