4th PhD-Staff seminar
Published on 25 November 2020
The 4th PhD-Staff seminar of the semester was held on 25 November 2020 with a staff presentation jointly presented by Manny Macatangay and Xiaoyi Mu and a student presentation by PhD student Ryan Bausch
“New Normal” or “Anomaly”? An analysis of the negative crude oil prices in the NYMEX futures market - Manny Macatangay and Xiaoyi Mu
The presentation centred around the drop in the price of oil futures to unprecedented negative figures which occurred in April 2020. The question raised was whether the negative prices were an anomaly or an occurrence which may likely continue to occur. To answer this question, the presenters highlighted several factors that could offer an explanation for the event.
Firstly, the COVID -19 pandemic and the subsequent lockdowns across the world resulted in a significant drop in demand for energy.
Also, prior to the lockdown, a price war between Saudi and Russia created an oversupply of oil.
The lack of demand and oversupply contributed to another factor which was the unavailability of storage space.
A fourth factor is the fact that the WTI futures contract is settled by physical delivery (at Cushings, Oklahoma). This means that upon its expiration, the holder of a futures contract becomes the owner of actual barrels of oil.
Also, Advisory 20 -160 issued by the CME might have amplified the risk as it in effect gave a signal that negative prices were possible therefore allowing traders with better ability to process public information take advantage of the situation. Dr Macatangay and Dr Mu pointed out that the short period of time between the issuance of the advisory and the settlement of the contracts may have increased the informational materiality of the advisory. The presented some data and anecdotal evidence on that hypothesis.
Other factors included a software glitch which interpreted zero instead of negative infinity as the lower price limit for trading thereby excluding potential buyers and sellers, who might have stabilized the market. Also, a group of traders acquired Trading at Settlement (TAS) instruments. A TAS contract is one in which traders agree to buy or sell contracts ahead of time for whatever the settlement price happens to be. Then towards the settlement time, they simultaneously sold WTI futures contracts thus contributing to the downward pressure on the price.
Dr Macatangay and Dr Mu concluded by pointing out that one of the main functions of a futures market is to hedge risks but the last-minute CME rule change appears to have amplified the risk and deviated from price fundamentals.
Presidential Elections in the United States of America: Understanding the electoral college - Ryan Bausch
In the light of the attention received by the recently concluded presidential election in the US and taking into consideration the significant influence of the United States has on the global energy market, it is important to have a better understanding of the electoral process.
Ryan Bausch, a PhD Student who is also a practicing lawyer in the US started by giving a brief history of the electoral college in America. He explained that it was a compromise between the election of the President by a vote in Congress as suggested by agricultural States which were sparsely populated and considered the majority of citizens unenlightened enough to make a such a decision, and election of the President by a popular vote as suggested by states with large cities which were densely populated.
The compromise was that Each state would elect a number of representatives (electors) equal to the number of its U.S. senators and representatives. These electors would then cast their vote for the president. With the exception of Nebraska and Maine, all of a state’s electoral votes are allocated to the slate of electors chosen by the political party of the candidate who won the state’s popular vote. A candidate is required to win 270 of 538 electoral college votes to become the president.