According to a Reuters report, a month after sellers had to pay nearly $40 a barrel to get rid of U.S. oil futures, the next watershed moment looms with the expiry of the June contract on Tuesday – and so far there is little sign of a repeat of the historic plunge.
What is it?
The extent of the damage that the coronavirus pandemic had inflicted on the oil industry came into focus on April 20, when the U.S. benchmark WTI CLc1 contract plunged to minus $38 a barrel.
The virus destroyed so much fuel demand as billions of people stopped traveling that there was almost nowhere left to store the oil. So on the day before the May contract expired, investors stuck with barrels had to pay buyers to take it away.
Recovering
A month later, governments around the world are slowly lifting travel restrictions and there are signs that demand is recovering from its nadir. Oil prices have staged something of a recovery, with U.S. crude rising on Monday to more than $30 a barrel and hitting its highest level since March 16.
As oil producers worldwide cut output rapidly, the pressure on storage is easing: U.S. government data this week showed crude inventories fell.
Enough To Prevent Panic Selling?
“There’s clearly a different feel to the oil market heading into this contract expiry, with production cuts having been enforced globally, either through deals or unilaterally,” said Craig Erlam, senior market analyst at OANDA.
“But will it be enough to avert another panic selling moment? The odds have certainly reduced … there’s a fine line between confidence and complacency and we can only hope that line hasn’t been crossed or early next week it could quickly unravel.”
Positive Mood
The positive mood was reinforced as U.S. Federal Reserve Chairman Jerome Powell issued an optimistic outlook for economic recovery later this year.
“Assuming there is not a second wave of the coronavirus, I think you will see the economy recover steadily through the second half of this year,” Powell said Sunday night in broadcast remarks.
Protecting Markets & Customers
Still, the U.S. Commodity Futures Trading Commission, the federal agency that oversees futures and options trading, issued a rare warning on Wednesday to exchange operators and brokerages ahead of expiry, telling them they need to protect markets from manipulation and potentially intervene to protect customers.
- Several brokerages or futures commission merchants (FCMs), including discount giant TD Ameritrade Corp, have restricted customers from buying new positions in some crude contracts since the price crash.
- The Chicago Mercantile Exchange, which hosts the trade in WTI futures, last week raised maintenance margins for the June contract by 20%. That would make it too expensive for some smaller retail investors to hold many open positions ahead of expiry.
- Asked about CME’s expectations, a spokesperson said the exchange would not speculate on whether prices will be negative for any product and referred Reuters to notices about its systems’ ability to accommodate negative pricing.
- Last month, the CME ordered the United States Oil Fund LP (USO.P), the largest oil-focused exchange-traded product in the country, to limit its position in the June contract to no more than 10,000 lots.
- The fund has issued filings to tell investors it has gone further than that – and has spread holdings through contracts expiring in July, August and September.
- Open interest in June is already dwindling as a result of those moves, standing at about 75,000 lots on Thursday, Refinitiv Eikon data showed.
- That was down from nearly 135,000 lots on Wednesday.
- On April 17, two days before the May contract expired, open interest stood at about 108,600 lots.
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Source: Reuters
