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The Negative Pricing of the May 2020 WTI Contract

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Abstract:
This paper sheds light on the negative pricing of the May 2020 WTI futures contract (CLK20) on April 20, 2020. The super contango of early 2020, triggered by COVID-19 lockdowns and geopolitical tensions, incentivized cash and carry (C&C) traders to be long CLK20 and short distant contracts, while simultaneously booking storage at Cushing. Our investigation reveals that C&C arbitrage largely contributed to the lack of storage capacity at Cushing in April 2020 and the price crash relates to the reversing trades of many long CLK20 traders without pre-booked storage. Additional aggravating factors included a liquidity crush, staggering margin calls and potential price distortions due to the trade-at-settlement mechanism. The analysis suggests that claims from experts that hold index trackers responsible for the crash are unwarranted: Index trackers did not trigger the negative pricing, nor widen the futures-spot spread by rolling their positions to more distant contracts ahead of maturity.

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Keywords: WTI crude oil futures contract, Negative price, Contango, Cash and carry, Index trackers, Disinformation

DOI: 10.5547/01956574.44.1.afer

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Published in Volume 44, Number 1 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.

 

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