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Crude oil collapse: what really happened?

What characterized yesterday was the collapse of the US WTI (West Texas Intermediate) oil futures

Unlike the Brent futures which, even if they have dropped to their historical lows in recent decades, have managed to stay above 20 dollars, those on WTI, the oil traded on US markets which expire today, Tuesday, April 21st, have been trading in negative territory, causing differences between the two most immediate maturities (May and June) of over 60 dollars.

This is not the first time that it has happened. When looking back at history before electronic exchanges, in 1987 a session took place with prices that fell into negative territory, without, however, closing under par, as happened yesterday.

This means that in order to get rid of the contract, the owners of the purchased futures, usually used by financial professionals or operators in the sector, prefer to dispose of them at a loss before the expiry date so as not to risk having to bear higher costs that would require the storage of the raw material itself.

In a social and health context such as the current one that is forcing the closure of many activities and consequently a collapse in demand for oil (in mid-April it was estimated to be about 36%), the producers of shale oil – the raw material related to the WTI – having already filled the tanks available for storage, have preferred to pay the buyer to avoid incurring additional costs required for the rental of tanks.

This shows that a possible production halt is much more expensive than continuing to extract new oil, the so-called shale oil almost entirely used for the self-sufficiency of the United States of America. This opens up entirely new scenarios in a global macroeconomic context already affected by the outbreak of the Coronavirus pandemic.

The collapse of the demand for oil in Europe and the United States is changing the macro-economic aspect both for the transport and for the storage of a raw material that until a little over a decade ago was considered to be running out, something that today is no longer the case, thanks to a new extraction system called ‘fracking’ that required significant initial investments and that today, according to certain mathematical calculations, require fewer costs instead of stopping its production/extraction.

Federico Izzi
Federico Izzi
Financial analyst and independent #trader – S.I.A.T. & Assob.it partner. He operates actively on stock and derivatives markets (futures and options) since 1997. A precursor of cyclic-volumetric analysis he is known for having identified the most important upward and downward movements in the financial markets of recent years. He participates annually as a speaker at the ITForum in Rimini since the 2010 edition and InvestingRoma and Napoli since the first edition of 2015. He is a guest and market expert on the "Trading Room" and "Market Driver" broadcasts of Class CNBC, Borsa Diretta.tv and on the evening news of Traderlink. Since July 2017 he is a permanent guest on LeFonti.TV, the only weekly national space dedicated to cryptocurrencies alongside the most important international experts in the field. He was interviewed as a cryptocurrency expert for Forbes Italia, Panorama, StartupItalia and DonnaModerna. He was recognized as the first Italian technical analyst to have published the first secular cyclic analysis on Bitcoin. Periodically publishes articles on ITForum News, Sole24Ore, MILANOFINANZA, TrendOnLine and Wall Street Italy. Federico Izzi is... "Zio Romolo".
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