Negative Oil Prices: CME Group's Response and Market Implications

CME Group says West Texas Intermediate crude oil futures “performed as they were designed" to when prices plunged below zero for the first time on record.

WTI futures represent 56 percent of global trade in crude oil futures, according to the Chicago-based exchange operator, and are the market’s choice for hedging risk in the sector. WTI is the U.S. benchmark for oil prices.

“Continued downward price pressure and a significantly steepening contango have created unique challenges for the global oil market over the last few months,” Derek Sammann, global head of commodities and options products at CME Group, said in a statement. Contango occurs when future prices are higher than spot prices, giving producers an incentive to hoard supplies.

“Stay-at-home” orders issued by governments around the world to slow the spread of COVID-19 caused global oil demand to fall from about 100 million barrels per day to 70 million. Increasing concern about storage capacity in the U.S. and elsewhere “intensified the downward pressure,” Sammann said.

Concerns of “oversupply, reduced demand and increasingly full U.S. storage” drove the May futures contract into negative territory ahead of expiration, the date when futures-contracts holders must accept physical delivery, Sammann said.

While many investors buy futures to speculate in possible price shifts, most don't want to own the physical commodity or pay for storage and were willing to accept significant losses to avoid that.

While negative energy prices are rare, there have been multiple examples in the U.S., U.K. and Germany, Sammann said, and CME Group has prepared for the chance that crude will turn negative again.

The exchange operator earlier this month switched its options pricing and valuation model to Bachelier -- a system named for the 20th-century French mathematician Louis Jean Baptiste Bachelier who studied options markets -- in order to accommodate negative prices for some energy products. The changes will remain in effect until further notice.

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WTI futures for June delivery rose 31 percent at $16.17 a barrel on Wednesday.