Understanding the Negative Pricing of the NYMEX WTI Crude Oil May 2020 Futures Contract

Abstract

Energy market pundits blamed United States Oil fund (USO), the largest WTI crude oil exchange traded fund, for the negative pricing of the May 2020 contract (known as CLK20) observed on April 20, 2020. Using Granger-causality tests, this article shows that USO influenced neither the price of CLK20, nor the price of any other WTI contracts it ever traded. We argue that a disastrous blend of macroeconomic and geopolitical conditions, such as a rising supply triggered by geopolitical tensions concurrent with a demand shattered by Covid-19 lockdowns, provoked a super-contangoed WTI futures market. The steep upward-sloping term structure of WTI futures prices, in turn, led to a spree of cash-and-carry arbitrages that depleted the spare storage capacity at Cushing. The realization of this capacity blowout induced a panic selling amongst long CLK20 investors that eventually lead to the negative pricing.