On April 20, we witnessed an epic oil price plunge into the negative territories, as prices for different maturities showed as follows:

Why could it be this way? WTI (West Texas Intermediate) futures only accept physical settlement with storage capacity in Cushing, Oklahoma. Delivery shall be made free-on-board (“F.O.B.”) at any pipeline or storage facility in Cushing with pipeline access to Enterprise, Cushing storage or Enbridge, Cushing storage. Delivery shall be made in accordance with all applicable Federal executive orders and all applicable Federal, State and local laws and regulations.

Brent futures are settled in a different way. The ICE (International Continental Exchange) Brent Crude futures contract is a deliverable contract based on EFP (Exchange of Futures for Physical) delivery with an option to cash settle against the ICE Brent Index price for the last trading day of the futures contract. The Exchange shall publish a cash settlement price (the ICE Brent Index price) on the next trading day following the last trading day for the contract month.

This explains why the spread between WTI and Brent futures prices continue to grow wider. Traders with long position without Cushing Storage capacity are forced to sell as the May WTI contracts settlement approached. Only two kinds of traders can buy from the sellers, existing shorts without physical storage and traders with Cushing storage capacity. Huge amount of ETFs and paper oil products tracking the May contracts were forced to roll into June or July contracts, which triggered large price swings.

WTI June contracts now come under pressure as well due to : (1) the potential exit of retail investors as they clearly see the negative carry incurred by each roll;  (2) the negative impact of June contracts rolling to July in early May (the USO ETF rolls on May 5 to May 8), and (3) the still unresolved market surplus that will hit binding storage capacity in coming weeks.

What about the Cushing storage capacity?  Cushing’s working storage capacity stands at around 76 million barrels, while shell storage capacity stands at 93 million barrels. The latest Cushing inventory figures as of April 14 is estimated to be around 60 million barrels, implying a 79% utilization. If the current pace of inventory building continues, we will see the full storage before the end of May, which will a big hit to June contracts.