Why the future contracts plunged into negative territory Last May 📉 ?

 The Coronavirus, has emptied out our cities, Billions of people are staying at home, and just a few are driving their cars, planes are grounded for many months, and Factories are Idled. The world is burning less oil, but the world's major producers have been pumping more than ever. As a result, the price of oil is falling down, and since there is no demand oil storages are filled up, some oil is stashed at sea on ships.

Alongside the US production flooded the market, Saudi Arabia and Russia , decided to produce less and prop up oil prices. But they seemingly couldn't come to term on new cut and started a price war against each other. Meanwhile, US producers continued to pump although prices are tanking and hits a record of more than 13 Million Barrel per day.

But why they kept producing ? good question, the Texan oil is hard to extract unlike the other countries, US oil companies borrowed heavily and built pipelines to drill wells therefore they can't stop their production seeking profits to cover their debt.

Recently OPEC members have decided to reduce their output by 10 million barrel day, so far the market didn't react because analysts say that we have a surplus of 30 million barrel a day, so even if we reduce the production by 10 million we still have 20 million barrel overproduced, this is why the oil prices kept going down.

Now we understand the global situation let's dive into the American oil market and see how the future contract plunged into neg
ative territory and how ?

In The oil market, besides sellers (oil producers, in this case) and buyers (refineries). We find Intermediaries (traders, market-makers, arbitrageurs …). These intermediaries only buy and resell a contract at the most profitable price, they do not have storage units or the technical tools necessary to maintain the goods in case it does not find a buyer. They only hold a contract at a price set today, for delivery on a specified future date. This is why we call them Futures

I'll give you an example, as a broker I'll buy a contract at today's price for a multiple of 1000 barrel, each contract has an expiration date, so my goal as a broker is to hold that contract and sell it before it expires at a higher price expecting to make some profit.

However, 21 April was the expiry date of May contract, in the United States, oil deposits were already mostly saturated. Due to the overproduction we had, therefore brokers were offering to resell their contracts with a bonus to get rid of merchandise that they could not store anyway. West Texas Intermediate crude for May delivery fell Monday more than 100% to settle at negative $37.63 per barrel, this why Trading futures is not recommended for beginning investors

Oil traders have never seen such an 'insane' market like this, especially during these bad times, the markets remain uncertain and unstable.