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"The Day that WTI Died: Asset Prices and Firm Production Decisions"

Event details of CIFRA UvA Finance Seminars: Erik Gilje (Wharton School of Business)
Date 29 April 2021
Time 15:00 -16:15

Abstract:*

On April 20, 2020 the flagship North American benchmark price for crude oil, West Texas Intermediate (WTI) for delivery in Cushing, OK, went negative for the first time in history, settling at -$37/bbl. We document that this event had a widespread effect on physical purchase contracts throughout the United States, despite ample storage capacity at many locations. We show that firms with crude purchase contracts indexed to WTI shut in production after this event at greater rates than those that did not. The difference in behavior is strongest among high productivity wells and occurs despite an overall improvement in pricing and crude market fundamentals after the April 20th event. Our evidence suggests that asset prices have important implications for the real actions of firms due to their importance as price setting mechanisms in contracting.

*Co-authored with Robert Ready (University of Oregon), Nick Roussanov (University of Pennsylvania), Jérôme P. Taillard (Babson College).

This seminar will be organised via Zoom. If you are interested in joining this seminar, please send an email to the secretariat of the Finance Group.