2020 WTI oil price crash

Please, first, do some self-learning by finding the short answers for the listed questions
[15 marks], and then write an essay (2000 - 2500 words) to give me some education on
the 2020 WTI oil price crash. [20 marks]

1. What are the difference between Crude oil (commodity) spot price, Crude oil
company stock price, Crude oil futures price (different month), Crude oil futures
option price? (1 mark)
2. Please find a similar graph online, copy and paste in your essay to verify the graph
below, then give a brief introduction of the negative WTI Crude Oil Spot Price on
20th April 2020. (1 mark)

WTC- | Crude Oil West Texas Intermediate WTI Cushing US FOB - data Source:
Thomson Reuters.

3. On the same day, the WTI crude futures contract, linked tightly to the physical oil
market. The Crude Oil Front Month Futures (CLc1) which expires in May closed
at -$37.63/bbl. Please find a graph online showing the above fact. (1 mark)

4. We know that the nearby contract turned negative, what about the deferred month
futures, e.g., the June contract? Was it also negative or it was still trading at a
positive price, please explain? Please also show me the graph. (1 mark)

5. If futures price turns negative, will future option price also goes to negative? Or
option strike price will be adjusted to a negative value, but futures option premium
is still positive? Please answer this question based on the table. (1 mark)
6. Does Black-Scholes option pricing formula still work for pricing futures option?
If not, why doesn’t it work? How to solve the option pricing problem allowing
negative underlying price? (Hint: exchange employed Bachelier model, please
explain this model.) (1 mark)

The Black-Scholes option pricing formula requires the underlying price to stay
positive. Then, Black-Scholes cannot be used to price the Crude oil futures option
when Crude oil futures price go negative. How did SEC solve the option pricing
problem allowing negative underlying price? (Hint: exchange employed Bachelier
model. You will be awarded a full mark by copying and paste the information from
the website and provide in-text citations with references. We will get back to this
piece of knowledge after we learn option pricing in week 7 and week 8.) (1 mark)
 Louis Bachelier (1870-1946)

7. A negative oil price is for the first time in history, and it unthinkably deviate from
the past seasonality. What do you think is the reason leading to this oil price crash?

a. Does Covid-19 relate to Oil price? (1 mark)

b. What are the choices of futures buyer near the last trading day in delivery
month? What does it mean that futures seller market corner the futures buyer?
(1 mark)

c. Can oil producer reduce their production or even close the well and reopen it
later? (1 mark)

d. 1933 Wisconsin milk strike, resulting in the dumping of the milk. What are
the difference between Crude oil and milk? (1 mark)

e. Who is going to pay for the delivery cost? Who is going to pay for the storage
cost after the delivery? How does it affect WTI oil futures price and spot price?
(2 mark)

8. How was Brent oil price? Was it also negative? Where is the Brent oil market
based around? (1 mark)

9. When it rebounds which of the prices are going to rebound quicker, Crude barrel
price, futures, options, price at petrol pump? (1 mark)
10. Does a negative Crude oil price mean that filling the car will suddenly get cheaper?
How does the negative WTI oil price impact on the Gasoline index (CTXBTR)
and Futures (RBc1)? Explain. (1 mark)