The U.S. Commodity Futures Trading Commission (CFTC) recently released an investigation report on the “negative oil price” incident in April this year. The report revealed that the “negative oil price” incident was caused by a variety of factors, including fundamental factors and technical factors. , including oversupply in the oil market, reduced demand due to the epidemic, and uncertainty in supply and demand, etc.
Officially released investigation report
Analysis of the “negative oil price” incident on April 20
This investigation report released by the U.S. Commodity Futures Trading Commission (CFTC) on November 23, U.S. time, shows On April 20 this year, at the end of the settlement period from 2:08 pm to 2:30 pm Eastern Time, the price of the May crude oil futures contract fell below US$0 per barrel. This was the first time since the inception of the WTI futures contract in 1983. .
On April 20, the May crude oil futures contract hit an intraday trading low of -$40.32 per barrel, with a final settlement price of -$37.63 per barrel. All other expiring WTI contracts settled at positive prices on April 20.
The report analyzes the “negative oil price” event from two aspects: fundamentals and technical aspects of trading.
Heath P. Tarbert, Chairman of the U.S. Commodity Futures Trading Commission, said, “This report provides important facts that our market surveillance professionals and economists can share publicly, including the use of non-public information and multiple Detailed analysis based on various data sources.”
Fundamental factors and technical reasons
Combined to lead to “negative oil prices”
The CFTC report pointed out that in terms of fundamentals, the “negative oil price” incident was mainly due to factors such as the slowdown in the global economy, the new crown epidemic, and reasons for crude oil storage at the time.
The first is the impact of factors such as the global economic slowdown and the new coronavirus epidemic. The report believes that the epidemic of the new crown pneumonia epidemic has significantly reduced the demand for crude oil, pushed oil prices lower, and pushed the 90-day historical crude oil price fluctuations to extreme levels. From January 2 to February 6 this year, the contract price of WTI dropped steadily from US$61.18/barrel to US$50.95/barrel. By March 2, the oil price had fallen to US$41.28 per barrel.
The CFTC explained in the report that part of the reason for the decline in oil prices from January to February may be the reduction in demand for crude oil from China and other Asian countries, and part of the reason is the decrease in demand for crude oil from China and other Asian countries. It comes from market concerns about the spread of the epidemic.
At the same time, in response to the decline in demand, OPEC+’s disagreement on reaching an agreement to reduce production has further increased the downward pressure on WTI contract prices. Although OPEC+ members later reached a historic agreement, oil prices initially responded modestly to OPEC’s announcement of production cuts, and WTI contract prices continued to fall. The CFTC believes this is because the production cuts will not begin until May 1. With short-term global demand weakening due to the epidemic, the crude oil market remains in a state of unrestricted production.
The second fundamental factor leading to “negative oil prices” comes from crude oil storage. The report pointed out that the COVID-19 epidemic has significantly reduced demand in the already oversupplied global crude oil market. Although OPEC+ reached an agreement to reduce crude oil supply, the production cuts are not expected to begin until May 2020. Therefore, in the short term, concerns about oversupply of crude oil production and insufficient supply of crude oil storage capacity continue to grow.
The report believes that the demand response of the crude oil industry to COVID-19 is faster than the supply response, leading to an intensification of the oversupply problem in the crude oil market. Consumption of refined petroleum and crude oil has fallen rapidly as the global economy slows, while efforts to cut production have lagged a sharp drop in demand. This has led to a rise in physical oil inventories, which has pushed down the original front-month prices. At the same time, expectations that crude oil demand will recover in the future are driving forward prices higher. Oil prices have fallen further in recent months as more oil flows into warehouses.
The CFTC concluded in the report that “negative oil prices” are the result of a series of broad fundamental factors. The oversupplied global crude oil market is experiencing an unprecedented drop in demand, while uncertainty about the scale and duration has pushed market volatility to historic levels. The OPEC+ production reduction agreement was lifted in March and the resumption of production cuts was postponed until May, further exacerbating concerns about oversupply of crude oil and ultimately raising concerns about the market’s ability to store excess production. These concerns are particularly pressing at the Cushing storage facility, which serves as the delivery point for the actual WTI delivery contract.
In addition, the CFTC also analyzed crude oil futures trading activities at that time in its investigation report, such as the liquidity of the contract and other factors.
Market response was lukewarm
Due to limited content provided in the report
However, despite the CFTC announcing the results of its investigation into “negative oil prices” in April. However, the market’s reaction to this was lukewarm, mainly because the survey report revealed this.Analysts said that OPEC+ is expected to agree next week to postpone production restrictions originally scheduled to be relaxed on January 1 next year, which is also a bullish factor for crude oil prices.
Weinberg pointed out that Libya has not been affected by the existing production cuts, and the country’s oil production has returned to more than 1.2 million barrels per day after local military commanders lifted the port blockade earlier this year. He added that Libya’s National Oil Corp. said it would commit to OPEC+ production cuts if it reached 1.7 million barrels per day, a level that could be equivalent to the country’s maximum production capacity. Weinberg said: “This ignores the entire point of the concept of voluntary production cuts and cooperation.”
In addition, market expectations for a slight decline in U.S. crude oil inventories last week also provided support for oil prices. The American Petroleum Institute (API) will release its crude oil inventory report for last week later on Tuesday, while the U.S. Department of Energy’s Energy Information Administration (EIA) will release its inventory report on Wednesday. </p
