Historic WTI contract collapse pushes some buyers, sellers to explore fixed pricing

Crude oil producers, refiners, and other traders in the US market may explore alternatives for pricing barrels following the historic collapse and extreme volatility in the May NYMEX light sweet crude futures contract last week, according to sources.

In the last three days of trading of the May contract, the settled price swung from $18.27/b on April 17 to minus $37.63/b on April 20, before rebounding to $10.01/b.

The collapse of May NYMEX light sweet crude contract, which delivers to Cushing, Oklahoma, was attributed to trading dynamics prior to the NYMEX light sweet crude contract expiration on Tuesday and a squeeze on available storage in the US, on top of extremely limited refinery demand due to the coronavirus pandemic.

"Most of the market is just gob smacked," one source said in the days following the price collapse. "This has messed up a lot, broke the system for sure."

Go deeper: WTI and negative pricing - what does it mean for oil markets?

Many Gulf Coast crudes generally trade as a differential against cash WTI, a term that refers to the front-month NYMEX settled price with the exchange futures for physical applied to it. If the basis for crude pricing experiences intense volatility, risk is increased for both buyers and sellers.

Pricing options

In order to counteract the volatility that was prevalent last week, sources have indicated to S&P Global Platts that both producers and refiners could move to fixed pricing, ridding the need for a differential based pricing altogether. A fixed price for barrels would set value on an agreed upon outright price per barrel and not rely on WTI Cushing movements as a factor.

"I'm seeing refiners trying to buy fixed prices," said one trading source last week. The move towards fixed pricing bases have not been limited to just one side of the market, as some producers of Bakken crude in North Dakota have begun to offer fixed-priced barrels at production points, traders in the market said.

"I'm hearing producers are scoffing at WTI CMA. Some producers will only sell at a fixed price. Things are getting wild," a trader said of pricing at the wellhead. Asked of the possibility of fixed outright deals for Bakken barrels, a source said, "It would not be surprising. There has to be some price assurance for operators, and that would do it."

While using fixed prices is one way to lower the risk associated with intense volatility in the crude pricing basis, using a calendar month average pricing basis is another way to protect against short-term pricing volatility by using a basis that takes a weighted average of forward futures contracts, limiting the exposure to wild changes in the front-month contract.

Many crudes produced in Canada and the US Midcontinent already trade against the NYMEX WTI CMA, and while sources have noted some USGC crude grades do trade against the CMA, USGC crude deals are generally heard done against cash WTI.

This, however, could be changing as trades for both Poseidon and Thunder Horse, two crudes produced offshore in the Gulf of Mexico and generally heard against cash WTI, were heard done last week against the NYMEX WTI CMA for May barrels.

Cushing storage close to full

Storage constraints are only expected to worsen in the coming weeks as oil demand has plummeted due to the coronavirus lockdowns while production cuts have failed to keep pace.

In Cushing, Oklahoma, S&P Global Platts Analytics estimates only around 10 million barrels of crude storage remained unfilled as of the week ended April 17, after stocks at the storage hub have skyrocketed by over 21.8 million barrels since the start of March to 59.74 million barrels, according to data from the EIA.

Should the builds continue, and there are no signs of abatement, Platts Analytics expects Cushing storage to be full in the next two to three weeks, casting a shadow on further volatility and uncertainty on pricing in Cushing.