The Negative Pricing of the May 2020 WTI Contract

On April 20, 2020, the price of the May 2020 NYMEX WTI crude oil futures contract (CLK20) dropped to -$37.63. This article investigates the plausible reasons behind this unprecedented event. Due to the COVID-19 lockdowns and geopolitical tensions, the WTI futures market had steered into a super contango in early 2020 that incentivized cash and carry (C&C) traders to be long on CLK20 and short more distant contracts, while simultaneously booking storage at Cushing. We show that C&C arbitrage explains the lack of storage capacity at Cushing in April 2020. The price crash was a consequence of the desperate reversing trades of long CLK20 traders who had not prebooked storage. Aggravating factors included a lack of liquidity, the staggering margin calls faced by long CLK20 traders as the price dropped, as well as the likely price distortion that occurred as a consequence of the trade-at-settlement mechanism. However, claims from energy commentators blaming index trackers for the crash seem unwarranted: Index trackers did not trigger the negative pricing or widen the futures-spot spread by rolling their positions to more distant contracts ahead of maturity.