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Negative Oil Futures Price Creates Confusion

Negative Oil Futures Price Creates Confusion

April 21, 2020
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Headlines had oil selling at -$37.63 per barrel at close on Monday, April 20. The negative sign in front? Sellers had to pay buyers $37.63 to take the oil off their hands. Except this wasn’t the price of oil. It was the price of a useful financial instrument, called a futures contract, in this case a contract for delivery of oil in May at a particular price. The nearest futures contract in date is often used as a proxy for the price of oil, since it trades regularly and usually tracks the price of oil well. But on Monday, quirks in the futures market created an artificial price that, while historic and capturing the extreme stress we’re seeing in the oil market, was not quite the same as the actual price of oil.

“Many people were shocked to see that oil prices turned negative,” said LPL Research Senior Market Strategist Ryan Detrick. “Futures contracts were about to expire, oil is tough to sell, and expensive to store right now.” Speculators tried to close positions as industry buyers blindsided by the collapse in demand stepped away, creating a situation where the loss was preferable to taking delivery of the oil.

The combination of an expiring contract, plummeting oil demand, little available storage, and very light volume all conspired to create the historic day. But that was for futures contracts for delivery in May. As shown in the LPL Chart of the Day, later delivery dates were still above $20 / barrel on Monday. But even these prices represent tough times for oil producers and oil producing regions. Yesterday’s price anomaly is another example of how efforts to contain the COVID-19 pandemic, even if necessary, are creating unprecedented shocks in the economy and financial markets. Combine that with high levels of production, and current struggles in the oil market are little surprise.

View Expanded Chart.

 

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This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results. The term Futures refers to future contracts, a financial contract obligating the buyer to purchase an asset (or the seller to sell an asset) at a predetermined future date and price. Contracts detail the quality and quantity of the underlying asset, and are standardized to facilitate trading on a futures exchange. Futures are used to either hedge or speculate on the price movement of an underlying asset, such as a physical commodity or financial instrument. The fast price swings in commodities will result in significant volatility in an investor’s holdings. Futures and forward trading is speculative, includes a high degree of risk, and may not be suitable for all investors. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy. This Research material was prepared by LPL Financial, LLC. Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates.  To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity. If your representative is located at a bank or credit union, please note that the bank/credit union is not registered as a broker-dealer or investment advisor.  Registered representatives of LPL may also be employees of the bank/credit union. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, the bank/credit union.  Securities and insurance offered through LPL or its affiliates are: Not Insured by FDIC/NCUA or Any Other Government Agency, Not Bank/Credit Union Guaranteed, Not Bank/Credit Union Deposits or Obligations, May Lose Value. For Public Use – Tracking 1-05000807