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Black Swan Alert: Oil Price Collapse

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This week saw another major Black Swan Event linked to the ongoing COVID-19 crisis.

On 20 April 2020 (Monday), benchmark US crude oil prices temporarily fell below zero for the first time in history. COVID-19, coupled with recent high-levels of global production and low levels of available storage, has resulted in a collapse in oil prices. For the first time ever, market participants effectively had to pay other market participants to take their oil, as some buyers did not have storage capacity available to allow them to take delivery of the oil.

On 22 April 2020 (Wednesday), oil price rebounded after President Trump raised Middle East tensions by threatening to shoot down Iranian ships.

Oil markets are likely to remain volatile for the foreseeable future.

These events may have a significant impact on your hedging contracts, your trading, shipping and insurance arrangements, and your business continuity arrangements.

Counterparties should review the terms of their derivative contracts, repo contracts, hedging arrangements, counterparty credit and default risks, in order the assess their positions and perhaps even take advantage of the current situation. Things to consider include:

  • Gain exposure to low oil prices through long-term forward contracts and futures
  • Making margin calls under derivative and repo contracts
  • Anticipating and meeting collateral support obligations
  • Offloading risks through buying credit derivatives (e.g. credit defaults swaps)
  • Opportunities to take on risks for potential profits by selling credit derivatives
  • Close-out and termination of derivative contracts
  • Anticipating and dealing with valuation and settlement disputes
  • Maintaining financial covenants and related remedy rights
  • Whether a ‘zero floor’ applies in circumstances where the prices become negative (both swaps and options).
  • Whether any amendments need to be negotiated
Please do not hesitate to contact any of us if you would like to discuss further.