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

Cong Sui and Mo Yang

Chapter 6 in The CME Vulnerability:The Impact of Negative Oil Futures Trading, 2020, pp 131-146 from World Scientific Publishing Co. Pte. Ltd.

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.

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 (search for similar items in EconPapers)
JEL-codes: G1 G10 G17 G32 (search for similar items in EconPapers)
Date: 2020
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