Oil derrick

The benchmark for U.S. crude oil is West Texas Intermediate (WTI), and WTI Crude Oil Future (COF) contracts are traded on the New York Mercantile Exchange. Each COF contract is for a total of 1,000 barrels, or 42,000 gallons. The pricing for each contract expires on a monthly basis, but trading of the 1,000 barrels can continue for ten years thereafter.

The Cushing Oil Field, was discovered in Oklahoma in 1912. Cushing went on to become the crossroads for pipelines, refineries and storage, and later, the official delivery point for the WTI COF settlement. The May contract expired Tuesday, April 21, 2020. It was most recently trading at negative $35.34, the first time prices have traded below zero, while the June contract is trading at $21.11. What does this mean for the industry? Sub-zero prices may tarnish crude oil as a safe investment, causing potential significant damage to the U.S. energy industry.

At expiration, future contract holders must take a physical delivery of 1,000 barrels of WTI. Picture a swimming pool that is 45-feet long, 25-feet wide and 5-feet deep!

Normally, refineries and airlines take the physical delivery, but there’s currently no demand. COVID-19 has crushed economic activity and continues to create a global oversupply in oil production. There’s only so much storage space. Meanwhile, tankers at sea are waiting to unload. And then there’s the Saudi Arabia-Russia price war. 

The Organization of the Petroleum Exporting Countries plus their allies (OPEC+) did agree to cut crude oil production by 9.7 million barrels per day through the end of June. That’s a lot of swimming pools.      

For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.

This information should not be construed as a recommendation of a particular investment strategy, it is being provided for illustration purposes only. The commentaries provided are opinions of Baker Tilly Investment Services, LLC. While the information is deemed reliable, Baker Tilly Investment Services, LLC cannot guarantee its accuracy, completeness, or suitability for any purpose and makes no warranties with regard to any results to be obtained from its use, or whether any expressed course of events will actually occur. Past performance does not guarantee future results.

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