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    Explained: Why WTI crude oil futures fell a mind-boggling 300% to -$37

    Explained: Why WTI crude oil futures fell a mind-boggling 300% to -$37

    Explained: Why WTI crude oil futures fell a mind-boggling 300% to -$37
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    By Nazim Khan   IST (Updated)


    US WTI May futures fell an unprecedented 300% to -$37. While the bizarre move highlights the demand-supply mismatch in the world economy, it also carries a technical reason. With storage space for oil fast running out, any buyer of the May futures, which expired the same day, would have had to take physical delivery.

    A futures contract for oil sank into the negative territory for the first time in history, meaning producers will pay buyers to take the commodity off their hands.
    The May contract for West Texas Intermediate (WTI), a benchmark for US oil, fell over 300 percent to trade at -$37.63, an unprecedented move that brought into sharp focus how much crude producers have pumped oil in a coronavirus-stricken world that doesn't need it but which is also explained by a technical reason. (The contract later recovered to trade at $1.)
    In a future contract, a buyer typically pays some money down with the promise that they would take delivery of a particular commodity or security on what is called the day of expiry.
    While speculators who do not intend to take physical delivery of a commodity exit the position before the day of expiry, only those who intend to take actual delivery of the commodity stay on till the end.
    The US WTI May futures, which fell into negative territory, are to expire on Tuesday, meaning anyone who still had the contract had to take physical delivery of the barrels of oil from Cushing, Oklahoma.
    Oil prices have recently crashed from the double whammy of a price war between Saudi Arabia and Russia and demand evaporation amid the coronavirus pandemic-induced lockdown across most parts of the globe. (Saudi and Russia later agreed to have cut production but their announcement did little to boost prices.)
    The oil oversupply situation has resulted in most storage spaces around the world being full. Storage costs onshore and offshore have skyrocketed in the past month, with super-tankers charging as much as $165,000 a day!
    Refineries, which process oil into automotive and jet fuels, and airlines are large buyers of crude oil.
    As a result, with WTI May futures set to expire, there appeared to be no takers for the commodity thanks to the storage problem.
    "This is a phenomenon due to the expiration of the front-month contract coupled with the historic plunge in crude," CNBC quoted KKM Financial’s Jeff Kilburg as saying.
    Crude oil futures for June, which expires on May 19, were trading at a weak but more realistic $20.43 a barrel.
    Brent crude, which remains the global benchmark for oil and trades in London, was down at $25.57.
    But the historic single-security plunge of crude oil into negative territory was enough to set off a string of memes on Twitter, with crude oil being the top trend on the microblogging site.
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