On April 20, that fateful day in crude oil markets when the CME May contract for WTI at Cushing collapsed to negative $37.63/bbl, the number of contracts involved in the chaos was relatively small. So you might think that most producers sat on the sidelines, watching Wall Street paper traders writhe in stunning financial pain. But not so. Almost all producers saw their crude prices that day crashing in exactly the same magnitude. That’s because the daily price of the CME WTI contract is part of the formula pricing used in a very large portion of crude oil contracts in U.S. markets, both directly and indirectly. There are two formula mechanisms that are commonly used in crude oil sale/purchase contracts that are responsible for that linkage: the CMA and WTI P-Plus. These arcane pricing mechanisms are complicated, but in order to understand U.S. crude markets, it is critically important to appreciate how they work. Today, we continue our deep dive into crude oil contract pricing mechanisms.
The CME NYMEX WTI crude oil futures contract is the underlying benchmark in nearly all U.S. domestic crude price contracts. Differences between futures and physical trading arrangements make pricing physical WTI barrels complex. Two formula mechanisms are commonly used in physical transactions that link directly to the NYMEX settlement prices — the CMA and WTI P-Plus — and so both contract types felt the impact of last month’s price collapse.
As we said in Part 1, the CME NYMEX WTI futures contract is the most liquid — or most widely and actively traded — commodity futures contract in the world, and is so ubiquitous that it also underpins domestic U.S. crude contract markets. It’s a strange symbiotic relationship, in that not only do cash crude prices heavily influence futures prices, but the cash contract price for most U.S. crude is indexed to the futures price. Differences between futures and physical trading, as well as the delivery mechanism that links the two markets, make pricing physical WTI complicated.
Canadian crude output is rising, requiring new export routes. As traditional pathways face constraints, the U.S. Rockies—especially the Guernsey, WY hub—are emerging as key corridors for moving Canadian heavy crude to downstream markets, including the Gulf Coast.
In Part 1 — which you’ll want to read first (if you haven’t already) before tackling today’s episode — we began by looking at the price components of a typical U.S. domestic crude oil purchase contract. We then worked through a calculation of the NYMEX Calendar Month Average (CMA) that is the base pricing element for many crude purchases. While the CMA is a part of the crude pricing formula, most deals also include a “roll adjust” mechanism that links the NYMEX CMA back to physical price timing. Today, we’ll start with an explanation of the “CMA Roll Adjust.” Then, if you are still in the mood to go to the next level, we’ll look at the most cryptic of all crude pricing mechanisms, the “WTI Postings Plus” (P-Plus) formula used to price WTI at Cushing and other locations.
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About the song
"Future Games" was written by Bob Welch and appears as the fourth song on side one of Fleetwood Mac's fifth studio album of the same name. Personnel on the record were: Danny Kirwan (guitar, vocals), Bob Welch (guitar, vocals), Christine McVie (keyboards, vocals), John McVie (bass) and Mick Fleetwood (drums, percussion).
The Future Games album was recorded at Advision Studios in London between June and August 1971, with Fleetwood Mac producing. It was the first album to feature American guitarist/vocalist Bob Welch and British keyboardist/vocalist Christine McVie. Released in September 1971, the album went to #91 on the Billboard Top 200 Albums chart and has been certified Gold by the Recording Industry Association of America.
Fleetwood Mac is an American/British rock band formed in London in 1967. The group has sold more than 120 million records worldwide. Eighteen members have passed through the ranks of Fleetwood Mac since its inception. The band has released 18 studio albums, nine live albums, 23 compilation albums, one EP and 62 singles. Fleetwood Mac has won three American Music Awards, two Brit Awards, one Grammy Award and are members of the Rock and Roll Hall of Fame. The band still records and tours.
