Intermediate

How our spot crude price is calculated

Chris Weston
Chris Weston
Head of Research

In ‘what exactly is the spot crude market’, we show you how liquidity providers and market makers create a cash price or a continuous price from the WTI futures market. These prices differ based on where they’re derived from on the futures curve.

Normal market pricing

In normal market conditions, our liquidity provider (LP) creates a cash US crude price from the front-month (or ‘active’) crude future. The greater the day count between the present date to the expiry of the futures contract, typically the larger the discount worn by the cash crude contract (price).

Because interest and other costs are built into the futures price, as each day passes there is an interest adjustment, resulting in the cash price and the underlying futures price converging until they are equal on expiry.

Disorderly market dynamics

This logic behind normal market pricing could change depending on the conditions in the underlying market at any given time. It’s dynamic and can change if there are increased concerns of erratic and disorderly pricing, with liquidity and potential order flow being core factors.

This is a strong consideration into and around the futures roll (understand more about the futures expiry and roll here), which came into the spotlight with the price on the May futures falling to -$40.32 the day before the rollover into the June contract.

Therefore, in extreme periods the LP may alter their methodology. This may involve reducing the variability and the sensitivity to the near-term futures contract by going out the futures curve to derive the cash price from a new future value or primary contract. By increasing the number of contracts, and the day count in the calculation, it creates a more stable price.

The LP may review this methodology if volatility settles and may take the decision to increase the sensitivity and volatility in the price. They’d do this by changing the primary contract back or closer to the front-month futures, and subsequently reducing the day count in the calculation.

Working price calculation

Today is 4 May 2020 and the LP is adopting the December WTI crude futures as its future value (or primary contract). The expiry date on the December crude contract is 20 November 2020.

We understand that there are 200 days between today and the expiry of the December future (the primary contract). This is important, because the cash price is worked back from the future values expiry date by a factor of the day count (200 days). You can ask our Pepperstone Support team for information on expiry dates, or source from the CME website.

The calculation uses a discount factor of 0.615%, this being the weighting that’s applied to bring the future value to the present period.

Example:

December futures - $28.09

Daily crude price adjustment = +0.615%

Day count to the primary contract expiry – 200 days

= 28.09 / (1 + 0.615%) ^ 200 days = Given where the December futures is trading, and the calculation involved the spot price will be $8.25

Swaps or funding considerations

In this example, each day the cash price is automatically adjusted higher by 0.615% at a set time each day. The result is that the cash crude price and the primary (December) futures contract gradually converge to become equal on expiry.

Clients holding a long position in US spot crude will pay a daily funding charge of 0.616% (the LP’s charge is 225% annualised). In effect, the daily adjustment to the cash crude price will positively affect the running P&L, while the daily swap adjustment will be subtracted from the account balance at 01:00 server time. This is inclusive of the typical 2.5% haircut.

For example:

$8.49 * 0.616% = You’ll pay 5.2 points

Clients holding a short position in US spot crude will see their P&L negatively affected as price will rise if they hold an exposure past the adjustment time. However, they will receive 0.603% (220% annualised), which will be credited to the account at 01:00 server time. This charge is inclusive of the typical 2.5% haircut.

For example:

$8.49 * 0.603% = You’ll receive 5.1 points

Additional information

Note, the annualised swaps charge on both the long and short charge are subject to change and may deviate slightly from the figure seen here. You will see the exact daily charge rate on the ‘specification’ tab on the trading platform.

There is a three-day weekend swaps charge, if positions are held past the Friday cut-off.

The methodology for our spot Brent crude price may differ from that of spot crude, so reach out to our support team for more information here.

Pepperstone doesn’t represent that the material provided here is accurate, current or complete, and therefore shouldn’t be relied upon as such. The information provided here, whether from a third party or not, isn’t to be considered as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product or instrument; or to participate in any particular trading strategy. We advise any readers of this content to seek their own advice. Without the approval of Pepperstone, reproduction or redistribution of this information isn’t permitted.