In this concise market‑commentary video, an experienced oil trader explains the unprecedented negative pricing of the May 2020 WTI futures contract. He walks through the live price spread (May at –$40/barrel versus June at +$20/barrel), showing a $57 spread, and attributes the collapse to a storage bottleneck at Cushing, Oklahoma. He draws a parallel to the 2011 Arab Spring, when a surge of US traders took physical delivery, filling Cushing and forcing WTI prices lower relative to Brent. The speaker then outlines fundamental commodity pricing theory: cost of carry, convenience yield, and how they shape the futures curve. He contrasts normal upward‑sloping (contango) curves with oil’s typical backwardated (inverted) curve, explaining why buyers normally pay a premium for immediate delivery. He describes how the current lack of storage flips this relationship, creating a severe distortion and breaking the usual convergence between near‑month and far‑month contracts. Historical context is added with the 2008 financial crisis oil spike, illustrating how calendar rollovers can force short positions to cover at high prices. The video concludes by warning traders that arbitrage strategies relying on predictable spread convergence can fail when correlations break down, urging vigilance in such unique market conditions. Contact information for Amplified Trading is provided for follow‑up questions.
Chapters
Welcome to this quick video to explain what is going on the oil market right now. To understand what's happening on the screen in front of you, you need to understand a bit about contango and backwardation. So I'm going to get on to that in just one moment, but let me have a look at the live prices now. May oil futures— you can see this right on the ladder in front of me— May oil futures are trading at minus $40 a barrel. In effect, you can or if this could happen, you could buy oil for delivery today at negative $40. I've been trading for nearly 20 years. I've never seen anything like this quite so sharply. On this chart, I'm actually looking at the relationship between May oil compared to June oil, and it's showing minus, minus 20. That's not true, actually, because if May oil is trading at now minus $35 a barrel, June oil is trading at $20 a barrel, and this is a $50 difference between the price of oil for delivery today compared to the price of oil for delivery, uh, in, in June. So this is absolutely phenomenal. Oh yeah, now that chart has caught up, the spread's caught up there. That's more like it. Minus 57, minus 57. There's a $57 spread between May and June oil delivery. I've never seen anything like this. So in order for you guys to understand what's going on, let me explain a little bit about some deep theory when it comes to understanding the oil price. I'm going to talk about when I last saw something like this in 2011 when we had the Arab Spring. So I'm going to try and keep this short and sharp. First of all, this is a quick Bloomberg chart showing, well, just what I've shown you, the front month. So the oil price for delivery now being much, much cheaper than the oil price for delivery in the future. I'm going to come back to that chart at the moment. The last time that we saw something like this was in 2011 during the Arab Spring, and I remember this really well. This is when— I don't know if you remember— the fruit seller in Tunisia set themselves on fire in protest about the regime, and that spread across Northern Africa into Egypt in Tahrir Square when Mubarak got deposed by the military, and then it moved into the Middle East with Bahrain and Oman. And what happened during this time in 2011 is a lot of US traders took delivery of oil. So, normally when you trade in the futures market, 98% of those contracts being traded don't go to physical delivery. But back in 2011, a lot of the US traders took delivery of oil and Cushing became full. Cushing is a huge storage facility in Oklahoma where a lot of US oil gets stored. The USA has diversified its storage capacity somewhat since 2011, for sure, thanks mainly to the Seaway pipeline. But the Cushing element is still a big factor here. So when Cushing became full, what that meant was— so let's have a look at the spread now, -33. What that meant was, if Cushing is full, if I was to buy oil in the futures market here, if I was to press buy, then I've got to take delivery of it. But if the only place I can store it is already full, then I've got a real problem on my hands because I've got nowhere to put it. Now, what happened in 2011, just to bring everyone back up to speed, was that that meant that the price of US oil, despite everything that was going on in the Middle East with the Arab Spring, the price of US oil actually started to tick lower. And that confounded a lot of my colleagues who were trading the spread between Brent, that's the oil that derives its price from the North Sea, and WTI, that's US oil. A lot of traders would normally trade the relationship between Brent and WTI because they would tend to move together. What we started to find in 2011 is the WTI price started to move lower and the Brent price started to move higher, and that's because there was nowhere to store it. And that's exactly what we're seeing in the prices today. I don't know how many traders out there remember this and can relate to this scenario, but that absolutely what's happened since the coronavirus outbreak and since the Saudi-Russia power play is that storage capacities have been getting full. No one wants to receive oil now. They don't have anywhere to put it, which is why it's absolutely fine to receive it in June. We're trading at $20.39 in June. For December oil, we're trading all the way at $32, certainly. But for oil now, no one's got anywhere to put it. To understand why that's the case, let's have a look at the difference between contango and backwardation. I'm going to try and make this as simple as possible. So, in a normal commodity market where you have to look after a product and store a product, you would normally have something called a cost of carry. The cost of carry is the price that you have to pay to ask someone to store your commodity for you. So, let's say if you look at a product like gold. If I wanted gold today, then I could buy it today for around $1,700 an ounce. That's great. But if I went to an exchange and said to the seller, "I want that ounce of gold that you've got in front of you, but I don't want it today, I want it in 12 months' time," then the seller of that gold is going to have to store my gold for me. And whilst he's storing my gold for me, he's not going to be able to do anything with the money that he could have got for selling it to somebody else. So he'll probably charge me what's called a cost of carry. And I want you to look at this chart now as like a snapshot, like a photo. Imagine this point here is now. And I'm looking for that gold to be delivered to me in a year's time. Well, obviously each month there's a charge, there's a cost of carry, and therefore the price of gold in 12 months' time, if I want to secure that price now, is going to be higher than if I want gold delivered today. Okay, so that's what we call a normal commodity curve. When there's a cost of carry, you've got to pay the seller to basically hold that commodity for you, and, and pay the opportunity cost of not having sold it to somebody else. However, oil normally works differently. Oil is normally considered a market in finite supply with high demand, and rather than having this yellow normal curve, we get an inverted curve. And it's this inverted curve that means that there's a real belief that there's limited supply, and there's a belief that there's high demand, and therefore people are willing to pay more to receive oil now than they are if they have to wait. And the shape of this curve, or the slope of the gradient of this curve, is really determined by something called the convenience yield. If I find it incredibly convenient to have it delivered to me now rather than in 12 months' time, then I want to pay a higher price for it now. If you're going to make me wait for 5 months to receive this commodity that I believe is in high demand and limited supply, then I'm going to pay a lower price for it. So the first thing to understand here, in a well-supplied market you get a normal curve. As you look out into the future, the price increases because the price contains the seller's cost of carry. Okay, when you have a market with limited supply, the curve is inverted because the buyer is saying, even though you've got a cost of carry, I'm I don't care, I want this now. It's an in-demand product and I'm willing to pay a higher price for it now. So the longer you make me wait, the lower I'm willing to pay for you, uh, for the product. So that's a snapshot. If that's a snapshot, then what happens then over time? Well, over time, this is the expected future price of the product, okay? That this is a meandering along over time till maturity. Normally, a product that's in contango, so with a normal curve— sorry, so normally, normally a normal curve, which is this yellow curve, okay— that divergence as a result of the cost of carry dissipates over time as we move forward in time. So the curve is moving lower and lower and lower and lower until we reach the spot price. However, when we have an inverted curve, as we often see with oil, that futures price moves higher to meet the expected future spot price, because obviously as time passes, it's less convenient for me to have it earlier because we're getting closer to the expiration of that futures contract. So in oil, for Futures contracts expire every month, okay? Normally, oil has an inverted curve and is in what we call backwardation. Backwardation means the nearer price is more expensive than the farther price, okay? The farther price is cheaper, which is why over time that farther price has to move higher in order to meet the current spot price that we see trading physically, the oil that you can actually see and touch. So what's happening that's strange now is actually all about convergence, and I've had a lot of people ask me about this question. We're now trading at minus $25 for the May future. A lot of people are saying to me, this doesn't make any sense. You might as well buy oil now in the futures market, get it delivered to you, hold it for a day, and then sell it for $20. You're making $44 a barrel. If you do that for 100,000 barrels, and that's a significant trade that you're looking— and it's here, it's available now. If you had somewhere to put it, if you had the capacity to take oil now, if you had the margin, if you had the funds, if you wanted to take oil now. What's happening now— and look, we've— we were nearly $40, minus $40, we're back already to minus $23. What's happening now with this oil futures contract that's about to expire, no one wants to touch it. You know, you've seen this, the liquidity is coming back slightly, but you've got severe gaps in liquidity, which means that, look, everyone's now moved over. We've rolled over to June despite the fact it looks like there's money on the table here now for anyone that wants to buy this May futures contract. Um, there's nowhere to put it, there's no appetite to do so. And it creates a severe distortion to prices. Talking about distortion to prices, I'm going to come back to those conclusions in a moment, but I wanted to also then look back to 2008. This is the interesting thing I find about markets— patterns repeat themselves. Here we actually traded $100, nearly $150 a barrel. This is during the financial crisis, by the way. We started to sell off, and this is when we had a $40 spike in oil. And again, that was all due to do with the calendar month rollovers. Many traders were short, they were holding on to their short positions, and all at the same time they got squeezed higher, pop, and had to, had to exit their positions before expiry, which normally happens about 9 PM UK time. So in conclusion, I want you guys to understand the relative, uh, the relationship between the current price versus the future price is normally a function of supply and demand, and that ratio between two calendar months is normally a function of supply and demand. Contango and backwardation strategies allow traders to take advantage of expected convergence and the change in that convergence from the future price to the spot price. But what we're seeing now really is quite unprecedented, and this is the kind of trend that traders need to be absolutely aware of when if you are executing an arbitrage trade, that means you're trading one product against the price of a related product, and a lot of traders do that for years on end. If you are trading that sort of spread or arbitrage trade, you absolutely need to be aware when these correlations break down, and you need to recognize this for the type of unique event that you're seeing in front of you on the screen. I hope you found that session useful. Please do ask us directly if you've got any questions at all, info@amplifiedtrading.com. Thanks for your time.
