Your April Oil Hedges Are Only 1/21st Affected by Monday’s -$37/Bbl WTI Settle

April 21, 2020April 22nd, 2020
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What does one day of negative oil prices mean for a hedge portfolio and the price received per physical barrel?

The chart above demonstrates the difference between traded prices on a Calendar Month Average (extremely common for oil producers) and the futures prices, which are negotiated deliveries to Cushing, OK. 

One day’s settle price for May WTI futures is not the price nearly all AEGIS clients’ hedge portfolios use for valuation. Most likely, your hedges are calculated on a calendar-month or trade-month average price.

Further, the WTI futures settlement is rarely the price AEGIS clients receive for produced barrels. Yesterday’s -$37/Bbl futures settle price would be included in your April daily average.

What you hedged; What you didn’t hedge

Precisely what price was it that had a -$37/Bbl settle on Monday? It was WTI futures. The futures daily settlements are based on a requirement to physically deliver barrels to certain facilities Cushing, OK. The contract specifies that a seller must deliver barrels there during the month specified. Buyers must take delivery there. The May futures contract settled at -$37/Bbl on Monday. It expires on Tuesday, April 21. After Tuesday’s settlement, barrels changing hands at Cushing per the futures contract will be done at that prescribed, pre-negotiated price during May.

However, most producers are insulated from one-day moves in futures prices. That’s because most producers’ barrels are not priced based solely on the futures settlement, although the WTI futures contract is indeed part of the equation.

AEGIS clients typically receive Calendar-Month Average (CMA) pricing. CMA is the average of the settle price on each business day during the month. The reference is usually the active contract (“prompt” month) NYMEX WTI Futures.

In fact, the current month being priced per CMA is April, not May. The May contract expires after Tuesday’s trading. April prices for most AEGIS clients will be the average of May WTI settles through April 21, and June WTI settle prices through April 30.

May WTI futures’ historic dive into negative pricing will be 1/21st of the price received for April barrels, under this very common pricing scheme.

—- See also our note on the mechanics of the CMA Roll trade: Do You Knead to Hedge the CMA Roll?

Could negative prices persist? Yes.

Monday’s trading of WTI futures showed that traders were not willing to take physical delivery of oil in Cushing in May. In fact, they were willing to pay $37/Bbl to avoid it.

There is one reason very likely explanation: There is no more storage for sale at Cushing where you could deliver a WTI futures barrel to satisfy that contract. This does not mean there is no storage; EIA publishes weekly estimates of crude in storage at Cushing, and periodically updates capacity figures. Storage capacity exists, but apparently the traders who sold WTI so low yesterday did not have access to it.

If this is true, then we should consider it likely that futures continue to trade weak. Yesterday’s settle for June WTI futures was $20.43. That number looks vulnerable.

There is still time to hedge June and the rest of the summer, and it may be wise.

We continue to monitor oil, gas, NGLs, and regional markets for hedging opportunities. To learn more and see AEGIS opinion and recommendations, go to AEGIS View publications, or contact [email protected]. Like what you see? Share this article with the button on the bottom right of your desktop. Market questions or comments? Contact us at [email protected]

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