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The price of WTI oil is going crazy. Futures contracts for May are trading around $ 40 or less. That means as much as the buyer gets this money per barrel (159 liters) for free. The unique event is currently the subject of heated debate in the media and on social media. But what exactly does that mean for investors? What is WTI and should I invest now?
What is WTI oil?
Due to its important properties for the economy, oil is one of the most commercialized raw materials. It is the basic energy provider of modern industrialized nations. The two most commercialized varieties are WTI and Brent.
Brent is crude oil that is extracted and traded on the European market in Europe, especially in the North Sea. WTI, for West Texas Intermediate, is financed in the United States and is primarily intended for the US market. Both types of oil have different properties, such as content and composition, different trading venues, and different prices.
How is the negative price of oil produced?
There are different prices at different trading venues. However, the standard price for WTI oil comes from the New York Nymex futures exchange, that is, that of the next expired futures contracts. A futures contract includes the obligation to buy a barrel of oil on a fixed date.
The next futures contracts are for May. Tomorrow, these will expire or will no longer be negotiable. Furthermore, the US market is saturated, also due to falling demand due to the corona crisis, and bearings are slowly reaching their capacity limits.
The term price is mainly driven by speculators who don’t really want oil physically, but are only interested in profits. As the contracts expire tomorrow and real demand is low due to the reasons mentioned above, speculators are now trying to sell their papers at all costs so that they do not have to worry about physical oil. This would be very expensive for them as they are not professionals in the field and do not have a warehouse or other necessary infrastructure.
In the image above you can see that the futures contract for June at $ 21 has also collapsed, but it is not worth mentioning. So this is a phenomenon caused by various circumstances. So far, this event is unique in WTI history, but that doesn’t mean that the price of oil will stay at the level any longer. The price on the Nymex standard exchange can be expected to skyrocket again tomorrow, as the June contract price will be considered official.
Still, the generally low price of oil is likely to be of concern to Americans at the moment. Lack of demand and overproduction by oil-exporting countries have brought the price to a level that falls below the profitability limit for oil shale produced primarily in the United States through costly fracking. The absolute pain threshold for existing wells was $ 20 at the time, according to a 2017 FAZ article, and $ 50 per barrel to open new oil wells.
conclusion
Now it is quite inconvenient to buy a May futures contract. Although you get money for it, there is a risk that you may have to pay more money to get it on time or you will have to physically withdraw the oil. All the effort to deliver, store and resell would probably cost more than the money you get.
Brokers generally do not take the official rate because they would suffer large losses. You only need to buy today, get money, and tomorrow the price would be above $ 21 again. Brokers take a different course for the prices of their WTI CFDs.
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