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WTI WTF! 😱

WTI, WTF!! What happened to oil?! 

Yesterday oil prices in the May futures contract fell massively negative for the first time in history. Major price vendors and market data sites reported incorrect prices unprepared for prices in any asset to go negative.

 

 

What caused the price drop?

Commodities are physical assets that are either very bulky to store (e.g. corn, orange juice), or environmentally unsafe, or both (e.g. crude oil). The cost of storing oil means that the vast majority of what is consumed daily is also produced daily. Relatively little is kept in inventory or storage. Contrast this with a financial asset where it is as easy to store $1trn digitally on a computer as it is to store $1,000. This means that small changes in the demand or supply can cause exaggerated movements in commodity prices. 

In recent weeks we have had extreme changes in both the demand for and the supply of oil:

  • Demand-shock

With much of the world in lockdown, demand for oil for gas in autos or jet fuel in planes has collapsed. Producers of oil aren’t technically capable of instantly turning off production in response to a ‘demand-shock’ like this. So they keep on producing more than the world needs.

  • Supply-shock

In fact, rather than reducing supply, one of the world’ s largest producers – Saudi Arabia – actually massively increased production by several million barrels per day! They flooded the world with oil when it was already drowning in it! ….I know…go figure!

 

How can prices go negative? 

The price of oil we see on our phones is actually the price of the short term futures contract. Yesterday the May contract ‘expired’. What does that mean? Because oil futures are ‘physically settled,’ anyone who had bought oil futures was obliged to take delivery of physical oil. But since the world is swimming in excess oil and storage capacity was full they had nowhere to keep it. So, rather than being forced to take delivery of a lot of unwanted oil they sold the futures contract. In fact, they were so desperate not to take physical delivery that they were willing to pay people to take the oil off their hands. 

The price collapsed to -$40 at one point! By contrast, the June futures contract doesn’t ‘settle’ for another few weeks so there was less panic by the people who own oil for June delivery. The June contract became the reference price for the data providers and the price appears to have jumped. In fact, it hasn’t. It is just these dynamics of short term delivery playing out. 

 

What is Invstr doing about it?

This has been a fascinating experience even for those of us who have been trading for over thirty years. We want Fantasy Finance to be fun and realistic. We work really hard to iron out price discrepancies to make the game as fair as possible. This is what we plan to do: 

  1. If you owned #wti up to 18:08 on April 20th, 2020 (UTC) we will close out your position at the last price we received for the May futures contract i.e. $0.009
  2. We will re-open the position at the first opening price we received for the June contract i.e. $21.338 as of 04:10 on April 21st, 2020 (UTC)
  3. We will cancel any trades that were made in between those price points. We will also adjust the capital amount allocated to all other trades.
  4. We will re-calculate the IFL Leaderboard to reflect these changes.
  5. We will do all of this starting 5 pm NY time. It will take a few hours to fix. During this time Fantasy Finance trading will be halted and the IFL will not be available.
  6. If you bought an Undo for a trade that we will cancel, we will find a way to give you another Undo in exchange. This only applies to Undos for trades on #wti between the times above. 

In the real world this would be called a ‘futures roll.’ We think this is the fairest way to deal with these unprecedented events. What a great time to be an Invstr!