The news of crude oil trading at -$40 per barrel on Monday was a big shock to all of us, since such event has never occurred before. The narrative everywhere was how Nigeria is in trouble, since oil money na wetin everybody dey share for Abuja.
Whilst Nigeria truly has to brace up for the financial challenges ahead as a result of the fall incrude oil prices, the impact of negative crude oil price was actually felt by a particular group of investors.
First, the crude oil in question was the Western Texas Intermediate (WTI), which is the major oil they produce in the US. The trade of this oil is organized into something called Futures. Futures means that buyers and sellers have entered into agreement to buy or sell the oil at a price fixed today.
WTI Futures are traded on Chicago Mercantile Exchange (CME) and each contract has its standard features. A contract unit is 1000 barrels and it must be physically delivered at any of the designated storage facilities in the US.
Let us leave acada matter first and go to the koko, which is the money matter. Many retail investors jumped into the WTI futures wagon because some Banks/Funds Manager packaged the futures for them like “Futurescrowdy”, I am sure you understand. The bet was that oil is at the lowest price and they will sell by May when the price must have recovered significantly.
The people like Bank of China who sold these oil-linked investments are not the big players in the oil trade business, so they couldn’t have known the nuances of the business. You can actually trade your contracts, but this na lock-down period, the real users like Airlines are not using at the moment.
The trading rule at CME is that trading terminates at 3 business days prior to the 25th calendar day of the month prior to the contract month. If the 25th calender day is not a business day, trading terminates 4 business days prior to the 25th calender day of the month prior to the contract month.
We can remember that this wahala happened on Monday, April 20. The contracts involved were for May 2020 . Therefore, April is the prior month for May deliveries and April 25th is a Saturday, meaning that trading must terminate on Tuesday (4 days prior to 25th). If you don’t trade before the deadline, you will be forced to take delivery on Tuesday.
Unknown to the newbie traders, the established oil traders like Vitol and Trafigura have already leased almost all the available storage space at Cushing, the normal delivery place. Therefore the newbies were forced to pay the big boys as much as $40 to accept the oil from them, since they don’t have any storage space of their own . These big boys can will sell the same oil under June Contracts and still make additional money oo.
The Losers here are the retail investors who subscribed to various oil-linked Exchange Traded Funds (ETF) or Mutual Funds. They just heard there is an opportunity in oil because that price has gone down but the end was disaster.
The lesson here is that you must never put your money in something you do not understand. The Investment Criteria for some people is that other people are investing in that same thing. Investors’ education is a must for anyone who wants to build true wealth in a sustainable fashion.
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