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Why WTI Futures Could Trade Below Zero Near Expiry

Article Quant Q&A · Author: Shahin
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Summary

The document explains how physical delivery and limited storage capacity can contribute to negative prices in a crude oil futures contract. It contrasts WTI futures, which are physically delivered at Cushing, with Brent futures, which are described here as cash settled. A trader or fund unable to receive and store oil may need to exit a WTI position before expiry, even at a deeply negative price, rather than take delivery it cannot manage.

The answers also explain that storage has a cost and that a long position at expiry entails taking delivery under the account presented. Simply refusing the oil would not erase the economic obligation. This gives a practical example of how contract specifications and delivery logistics affect futures prices. The explanation is focused on the episode and market structure described; it does not quantify storage constraints or cover every contract's rules, participant type, or delivery arrangement.

Key ideas

  • WTI futures are physically delivered, so a long position at expiry can entail receiving oil at Cushing.
  • Participants without the ability to receive and store crude may have to exit before delivery becomes an issue.
  • Storage costs can make a negative futures price economically possible when delivery capacity is constrained.
  • The document contrasts WTI delivery with Brent's cash settlement and does not generalize across all crude contracts.

Tags

FuturesCommoditiesMarket microstructureRisk managementUS markets
Full text
# Crude Oil futures contract delivery


# Crude Oil futures contract delivery












Today was a historical moment with prices for Crude Oil futures contract failing below 0. My question is, if you are a contract holder - can you just refuse the delivery, given that the contracts are usually delivered in at least 2 weeks time? Why do you have to sell at a negative price?

Thanks

## Answer by demully (score 1)

https://quant.stackexchange.com/a/58762

The crux of the problem is that US Crude (ie WTI on NYMEX) is physically delivered; while Brent (on ICE) is cash delivered. If I'm a say WTI ETF, then I won't have any account with any registered warehouse in or around Cushing to deliver the barrels to. So I can't take receipt and just sell those via the next month contract. So I have to sell this month's contract at ANY price, because I am not equipped to physically receive the physical delivery. Which is why WTI went negative; while Brent did not.

The problem here is the inability of financial "investors" (in WTI, but not Brent) to accept physical delivery. So they must sell, whatever the price. Even if they could "refuse delivery", then that's like saying they bought their oil, paid for it, and let the vendor keep it... the vendor being able to re-sell it at a positive price, that the buyer cannot. That's no solution.

## Answer by ThatDataGuy (score 0)

https://quant.stackexchange.com/a/54219

If you are long the futures contract at expiry, then yes you have to accept delivery.

It seems that many people are fascinated by the price being 0 or less. However, this is not really that strange. You still have to store the stuff, and that costs money.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.