Oil Benchmarks Under Stress

This Comment analyses how the various oil benchmarks are coping with the unprecedented shock hitting the oil market. The collapse of the futures May WTI price and the negative pricing on April 20 epitomizes the extent of the stresses in the oil system but also exposes the vulnerabilities of some of the oil benchmarks to the current shock, the pricing assessment methods, and our understanding of what these benchmarks really represent. It also reveals a deeper fundamental issue related to the relationship between the futures and physical prices. While some of these vulnerabilities have short term fixes, others may take a long time to emerge. But regardless of its underlying causes, the extreme dislocation of the May WTI contract in its last two days of trading is an early warning of the extreme volatility and the sharp price movements that are still to come.

By: Bassam Fattouh