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Why Oil Prices Plunged and Settled Negative: A Game-Theoretical Perspective

In: The CME Vulnerability The Impact of Negative Oil Futures Trading

Author

Listed:
  • Chenghu Ma
  • Xianzhen Wang

Abstract

We provide a game-theoretical explanation to the negative prices event of WTI2005 on April 20, 2020, in the context of a battery of economic phenomena. First, in the wake of the petropolitical maneuvering among several of the largest oil producers and the outbreak of the COVID-19 pandemic over the world, the global oversupply has caused tremendous pressure on oil prices. Second, speculative activities and the physical delivery mechanism led to a significant long-short imbalance, especially as the Cushing storage was reaching its capacity. Third, the Chicago Mercantile Exchange’s (CME) introducing of the negative price scheme stimulated strategic interactions among futures traders. The negative prices were triggered by the existing long buyers, while their counterparties showed little resistance, reflecting the fact that the market was vulnerable and highly susceptible to manipulation, and some active long/short investors may form a coalition to exploit the specific trader(s).

Suggested Citation

  • Chenghu Ma & Xianzhen Wang, 2020. "Why Oil Prices Plunged and Settled Negative: A Game-Theoretical Perspective," World Scientific Book Chapters, in: George Xianzhi Yuan (ed.), The CME Vulnerability The Impact of Negative Oil Futures Trading, chapter 5, pages 105-130, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789811223204_0005
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    More about this item

    Keywords

    CME; Vulnerability; WTI; Oil; Trading; Rule; 420; Negative Trading Price; Best Practice; Valuation; Risk Management; Regulatory; Rule; Accounting; Standard; Fair Value; Trading Behaviour; Covid; Corona;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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