Institutional investors are leaving the front month crude contract over fears of more negative pricing, reports Phil Flynn.
The front-month WTI crude oil future is becoming a very lonely place. Fears that storage will top out and predictions of another assault on negative oil prices are making firms and exchanges force the hand of participants and pressure them to exit the market.
Reuters reported that the United States Oil Fund LP ETF (USO) had been ordered by CME/NYMEX to reduce its holdings of WTI futures contracts in June and July, which USO announced yesterday in a filing with the Securities and Exchange Commission (SEC). They report that sales will be completed between Monday and Thursday. Because the USO has become a forced seller, potential buyers and market makers have marked down their prices, knowing USO will still have to accept some of them, which is what has created a renewed drop in WTI prices on Monday, this time for contracts with June and to some extent July delivery dates.
Yet it is not just the USO fund that is being pressured to exit the market. The S&P GSCI and Dow Jones Commodity Indexes told clients to roll their exposure out of the June WTI crude oil futures into July with immediate effect due to the risk of negative oil prices for the June contract. Many clearinghouses are making healthy suggestions, if not outright denial of trading privileges, in the front-month WTI future as fear of unprecedented volatility might smash both the bulls and the bears in oil. They even fear short positions because of the potential for sharp snap-back swings on low volatility. After the USO gets out, the front-month crude contract might look as desolate as the eerie empty streets of downtown Chicago.
The Russian Energy Minister, Alexander Novak, is predicting that the global oil market may start re-balancing in the second half of the year. He said he is counting on the oil market to work out the imbalance starting from next month once the OPEC Plus deal goes into effect. Yet at the same time, he is not looking for a sharp increase in oil prices.
Reuters is reporting that, "Oklahoma's governor has called on U.S. President Donald Trump to declare the Coronavirus pandemic an "act of God," a step to help oil-producing states contend with a crude glut that caused futures prices to close below zero last week for the first time. "Over-production of oil continues to threaten the economy," Governor J. Kevin Stitt said in a letter to Trump that Stitt posted on Twitter late on Saturday.”
Oil spreads and options may be the way to go. The market is still pricing in demand coming back and production tanking by the end of the year. Volatility may make some more exotic spreads very interesting.
Trade strategy may be key to ride out the crazy moves that will come with the headlines so keep in touch with our daily analysis. Makes sure you are getting my Daily Trade Levels! Read Phil’s energy report at Price Futures Group. Twitter: @energyphilflynn | Facebook: Phil Flynn
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