Future(s) Games, Part 2 - The Baffling Impact of Oil Futures on Physical Contract Prices - CMA Roll Adjust and P-Plus

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.

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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