Question

Did the SPOT price of oil turn negative on Monday 20th. Also, show mathematically using the...

Did the SPOT price of oil turn negative on Monday 20th. Also, show mathematically using the futures formula for commodities how a negate futures price occured on Monday 20th

Homework Answers

Answer #1

Yes, the SPOT price of oil turn negative on Monday 20th. This is because the storage cost exceeded the value of oil.

F = (Spot + Storage cost)  * e ^(rt)

Since the storage cost is more than the value of the crude oil, nobody is willing to buy crude oil. So, the price dropped below zero.

Theoretically, if the storage cost increases, F increases. But, if someone buys Futures contract, he is obligated to take delivery. This causes two problems. 1. As there is no demand for crude oil, the prices of crude oil have dropped significantly. No value to crude oil. 2. The buyer of the futures contract has an obligation to take delivery of a commodity that is worth close to nothing. In addition, since there is no demand, he has to store barrels of crude oil. It costs significant amount of money to store and increases the risk of fire as well.

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