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Crude oil


Binny

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2 hours ago, Binny said:

Can crude oil $ in spot Buying go below zero ?

Thanks for your post, The piece below just went live. You can find the full article on the MyIG page: 

With oil prices on some data providers crashing into the negative, you’ve probably noticed that oil prices on IG’s trading platform haven’t (thus far), and that has to do with how prices are extracted. To put things into context, it was the infamous May contract (which has now expired) that went into negative territory, but given how oil prices are extracted, spot oil prices on IG’s trading platform didn’t go anywhere below $0 (or even below $20 at the time) when the rollover mayhem occurred in the oil futures market.

So how exactly does IG price its spot oil?

Two futures contracts are used to price our spot price, and that’s a combination of the nearest (or front month) contract to the next, further (back month) contract, essentially moving towards the further contract as time progresses.

The May contract went negative at the very end prior to settlement, and at the start IG’s spot oil price is much closer to the June price than the July price, explaining the similarity between the platform’s price and the June contract compared to the higher priced July contract. Expect the platform’s price to reflect less of the June contract and more of the July contract as time progresses.

That makes oil prices on the platform different from that seen on other platforms, and has resulted in oil prices on IG’s platform avoiding Monday’s carnage that may have been witnessed on other platforms. In fact, if other data or trading platforms incorporate the cost-of-carry, then you might have seen prices below that of the front month contract.

Can IG’s oil prices go negative?

Absolutely, but here we need to look at the different contracts on the platform.

If it’s our futures contracts (June and July are presently available), then should the underlying contract go into negative, then that would translate into negative prices on our platform for that specific product that tracks the underlying that went negative. In other words, if June goes negative, you would see that on the platform, same holds true for July, and if both went negative you would see negative prices on both futures contracts on the trading platform.

As for spot (or undated contracts), as explained previously its based on the front and back month, and that means negative oil prices can’t be ruled out, as should the current June and/or July oil contracts go negative, and that would translate into negative prices on our platform as well, especially if the June contract plummets more when the price bias from the contract is higher earlier on, and will be less of a factor as time progresses and the spot contract’s price takes a heavier weight from the back month July contract.

Trading when the product goes negative and calculating margins

If you have an open position and oil prices do go negative on the June contract for example, you can still close that position (at the very least, close-only will be available should prices go negative). In terms of calculating margins, it is calculated as the higher of (1) 5%, or (2) 80 points times the positions.

For example, if you have one contract on US Crude Oil, then the result at a price of 1394.4 would be calculated as such (1) 10 x 1394.4 x 5% = $697.20, and (2) 80 x $10 = $800. The higher value in this example is $800, which would be the margin in this example, as well as for any price below and into negative territory. Should oil prices recover to a price of $1601 and above, then margins would be calculated using the first method.

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