Crude (WTIC) May futures contract set itself on fire last night = down 330% to a low of minus 37.63$.
Why did Crude have an existential crisis last night? .This was all about the expiry of futures contracts on 21st April The long and short of it is in the US markets -Crude is a physical deliverable contract at Cushing OK. ( its not on MCX, India) . So if a trader holds a position whether long or short 48 hours before it expires they are obligated to take or give delivery of the physical product. There are no exceptions.
That’s where the drama came in – The outstanding May contracts last night were app 109k in size –which is roughly over 1 Million Barrels. So with less than 24 hours to go and no storage available at Cushing, traders were forced to sell at any price, in this instance at negative prices, to take physical oil, off their hands. It was not just at Cushing though – it spilt over to every grade of oil as producers/refiners were ready to pay to get this oil off their hands because there is really no one that needs crude with the country in shutdown? What is coming next?
President Trump just announced the US will be adding 75MB to its SPR – but he needs Congress to vote on it. On the flip side Shale got capped / Canada stopped producing… so did President Trump get his 350k MBPD cut promised on behalf of Mexico to OPEC without lifting a finger ?? ) As for that 35MB of Saudi oil queued up for delivery on US shores – Trump wants to halt their shipment. This will be this week’s breaking story….
The second part of the story was retail buying s i the USO ETF (a long oil fund) – They were forced rolling May to June at a 10$ premium only to have a bill handed to them by the ETF who squared their May longs at an 8-10$ loss at the very least. For those who went all into that USO ETF last night thinking they were buying at 0 or negative prices – guess again! USO expired on 20th – and they are all long June at 21$ odd. Evidence – that ETF filed last night to authorize an increase to shares outstanding to 4 billion. That ETF had an OI of only 120 M at the start of the year, currently the OI stands at just over 1.1 B. The pain is not over yet – the fund currently trades at 8% above its NAV. The other thing to keep an eye out for is problems at the CME. Oil is traded with high levels of margin and lots of leveraged funds have ended up on the wrong side of that trade. Will find out soon enough who was holding the bag. ATM it appears that Hin Leong Trading, a Singapore trading firm is the first victim. It is holding 4B$ of debt and has filed for bankruptcy.
Hot money / Lemmings / Retail are always chasing volatility. They found it in oil, much to their misery. The moral of the story – when retail buys it’s usually the top, when they sell it’s the bottom.