Through analysis, it was found that the negative prices in the crude oil market in the second quarter were due to the development of the futures market, which enhanced the financial attributes of crude oil. The temporary changes in CME rules played a role in fueling this. The fundamentals of supply and demand deteriorated and futures contracts moved closer to delivery. Insufficient liquidity resulted in a financial crisis in the crude oil market. The current crude oil market has fallen sharply for two consecutive weeks after experiencing a three-month consolidation. This reminds crude oil investors that in the current situation of high uncertainty, the judgment of crude oil should not only focus on the impact of supply and demand fundamentals, but also pay attention to the impact of financial attributes on its price fluctuations.
The reasons for negative prices in the crude oil market in the second quarter
Affected by the new coronavirus Affected by the pneumonia epidemic, crude oil prices have fallen continuously since the first quarter, and the drop to negative prices in the second quarter is even more breathtaking. In April this year, international crude oil prices fluctuated violently. On April 21, when the WTI May crude oil futures contract ushered in the last trading day, oil prices plummeted to -37.63 US dollars/barrel, falling to a negative value for the first time in history, with a drop of 305.9 %.
The picture shows the WTI crude oil futures forward curve (unit: US dollars/barrel)
The picture shows the intertemporal spread of WTI in recent months (unit: US dollars/barrel)
1. Product attributes: basic Fundamental analysis
The plunge in oil prices is inseparable from fundamental support. In March this year, the sudden drop in demand in the crude oil market caused by the COVID-19 epidemic and the increase in supply caused by the price war jointly promoted the first round of plummeting in oil prices. At the end of March, the price of WTI crude oil fell to around US$20 per barrel. Such oil prices have exceeded the expectations of various oil-producing countries. U.S. shale oil companies are the first to bear the brunt. The production cost of young shale oil companies is as high as US$45 per barrel, making it difficult to operate at such low prices for a long time. Russia and the major oil-producing countries in the Middle East are also under tremendous financial pressure because prices are too low to balance their fiscal balances. In order to help the US energy industry get out of the price trough, US President Trump began to mediate between Saudi Arabia and Russia. Finally, from April 9 to 13, OPEC+ held another production reduction negotiation meeting and reached a phased production reduction agreement. However, even if the largest production reduction agreement in history is reached, the intensity of the production reduction is still not enough to offset the weakness on the demand side. Combined with the impact of large inventory accumulation in the early stage and the impending exhaustion of storage space in the Cushing area of the United States, the market generally believes that supply will be further oversupplied in the short term, which will lead to Oil prices plummeted into the abyss.
2. Financial attributes: financial market analysis
According to the above crude oil Fundamental analysis can explain the weakness of crude oil prices, but the emergence of strange “negative prices” must also be analyzed from the financial attributes of crude oil. According to classic economic theory, the impact of supply and demand on commodity prices is based on a two-dimensional plane diagram in which price and quantity increase from zero. Therefore, in many people’s perceptions, the price of crude oil cannot be negative. . Obviously, this understanding is based on treating crude oil as a commodity with only commodity attributes. However, once it enters the financial market, the bottom line of price is no longer zero, such as negative interest rates. With the rapid development of the derivatives market, the financial attributes of crude oil have been greatly enhanced. Futures prices have become the benchmark for guiding international crude oil trade pricing, and crude oil has therefore become a financial product that affects the global economy. In fact, it is the financial attributes of the modern crude oil market that add fuel to the fire in the futures market, eventually leading to the emergence of negative prices, which is reflected in the following aspects:
First, negative price correspondence The WTI crude oil futures price is generated in the NYMEX crude oil futures market in the United States. Therefore, this price reflects the long and short supply and demand relationship of the WTI crude oil futures May contract in the futures market, rather than the spot price negotiated by crude oil traders. . Although the futures market has a price discovery function, and futures prices guide spot prices, the negative prices only lasted for a few minutes, and then quickly rebounded to positive levels. That is to say, when the futures market at that time was approaching settlement, the long and short futures contracts suffered a serious imbalance, which led to short-term extreme prices and deviated from the supply and demand situation in the crude oil spot market. In the case of liquidity shortage, the derivatives market produced The price has very limited guiding significance for the spot market, or even no guiding value.
The picture shows the comparison of long and short positions in WTI crude oil futures contracts of crude oil companies (unit: lot)
The picture shows the comparison of the long and short positions of the WTI crude oil futures contract of the swap dealer (unit: lot)
The second is that the May contract of WTI crude oil futures is about to arrive. The role of financial attributes in the plunge in crude oil prices can also be seen in a comparison of short and long positions held by period producers and swap dealers. From January to April this year, the long and short positions of oil companies’ WTI crude oil futures contracts were roughly balanced.Back to the original Whaley and Black 76 pricing models. This means that from the perspective of the exchange, the U.S. crude oil futures market will no longer experience negative prices for a period of time, giving crude oil bulls and financial institutions a reassurance.
The picture shows crude oil price and OVX Volatility Index (unit: US dollars/barrel)
Need a reminder Investors and financial institutions believe that although the current futures option pricing models are Whaley and Black 76, this is a judgment at the current stage and does not mean that CME will not make adjustments in the future. The current crude oil market is hovering between weak demand, large-scale production cuts, the resurgence of the epidemic, and economic recovery. After three months of consolidation, it has fallen sharply for two consecutive weeks, many of which are technically oversold. This reminds crude oil investors that when judging the crude oil market, they not only need to pay attention to the impact of supply and demand fundamentals on prices, but also note that the development of the derivatives market has greatly enhanced its financial attributes, and investor expectations and technical operations are exacerbating the volatility of the crude oil market. , under the current situation of high uncertainty, we should control positions and leverage and do a good job in risk management. Financial institutions should also seize the time, keep up with the pace of exchanges, and actively develop risk measurement models and investment trading strategies that adapt to various situations. </p
