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Tanker Shipping and Negative Oil Prices: More Than Just the Freight Rates

In: The CME Vulnerability The Impact of Negative Oil Futures Trading

Author

Listed:
  • Cong Sui
  • Mo Yang

Abstract

On April 20, 2020, the West Texas Intermediate crude oil futures contracts for May were traded at as low as $–40.32 per barrel on the Chicago Mercantile Exchange. This was a very unusual mispricing. First, the mismatch between supply and demand had caused a slump in oil prices. Second, the rise in oil storage led to increased cost of inventory and shipping, which had further impact on oil prices. Third, the trading principles and features of oil futures on exchanges triggered the mispricing of crude oil futures. However, when faced with such huge mispricing, arbitragers did not take the arbitrage opportunity initially due to constraints of holding tankers or tankships. Retrospectively, arbitragers did take action, but with a one-day delay. The post-event performance of the shipping market indicates that holding tankships is of vital importance in the arbitrage of crude oil mispricing.

Suggested Citation

  • Cong Sui & Mo Yang, 2020. "Tanker Shipping and Negative Oil Prices: More Than Just the Freight Rates," World Scientific Book Chapters, in: George Xianzhi Yuan (ed.), The CME Vulnerability The Impact of Negative Oil Futures Trading, chapter 6, pages 131-146, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789811223204_0006
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    More about this item

    Keywords

    CME; Vulnerability; WTI; Oil; Trading; Rule; 420; Negative Trading Price; Best Practice; Valuation; Risk Management; Regulatory; Rule; Accounting; Standard; Fair Value; Trading Behaviour; Covid; Corona;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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