On April 20, we witnessed an epic oil price plunge into the negative territories, as prices for different maturities showed as follows:
Brent futures are settled in a different way. The ICE (International Continental Exchange) Brent Crude futures contract is a deliverable contract based on EFP (Exchange of Futures for Physical) delivery with an option to cash settle against the ICE Brent Index price for the last trading day of the futures contract. The Exchange shall publish a cash settlement price (the ICE Brent Index price) on the next trading day following the last trading day for the contract month.
This explains why the spread between WTI and Brent futures prices continue to grow wider. Traders with a long position without Cushing Storage capacity are forced to sell as the May WTI contracts settlement approached. Only two kinds of traders can buy from the sellers, existing shorts without physical storage and traders with Cushing storage capacity. Huge amount of ETFs and paper oil products tracking the May contracts were forced to roll into June or July contracts, which triggered large price swings.
WTI June contracts now come under pressure as well due to : (1) the potential exit of retail investors as they clearly see the negative carry incurred by each roll; (2) the negative impact of June contracts rolling to July in early May (the USO ETF rolls on May 5 to May 8), and (3) the still unresolved market surplus that will hit binding storage capacity in coming weeks.
What about the Cushing storage capacity? Cushing’s working storage capacity stands at around 76 million barrels, while shell storage capacity stands at 93 million barrels. The latest Cushing inventory figures as of April 14 is estimated to be around 60 million barrels, implying a 79% utilization. If the current pace of inventory building continues, we will see the full storage before the end of May, which will a big hit to June contracts.
It is in fact a problem of the WTI contract settlement mechanism, which is taken advantage by short sellers. We could probably see some rule changes in the coming days. The oil ETFs also have significant impact on the market. USO, the largest oil ETF, holds around 28% of the WTI June contracts outstanding. When USO rolls again, it will certainly move the market.
We are seeing Bitcoin retreating together with gold, while the dollar index rises above 100, implying liquidity problems caused by the WTI plunge. As the petrodollars exert huge impacts on the market, and still in the memory of many is the fall of the Bitcoin market coinciding with the oil price tumble, crypto traders have to keep a close eye on the oil market as sentiments echo.