Could oil markets turn negative again next week?

As oil prices stabilise, we examine some of the key concerns from the U.S. Commodity Futures Trading Commission (CFTC) in the lead-up to WTI's June expiry.

Key oil market observations:

  • WTI last traded at US$27.62 a barrel; Brent Crude at US$31.40 a barrel
  • The CFTC is concerned about volatility as WTI’s June contract moves towards expiry
  • On Brent, UBS says the ‘worst of the demand shock is now behind us’

Oil’s maddening descent into negative territory in April was an unprecedented event for commodity markets. At its most pronounced – in the lead up to the expiry of WTI’s May futures contract – WTI traded at a staggering negative US$40.32 a barrel.

A confluence of factors led us there: crippled demand, concerns over US crude storage capacity, a near complete evaporation of liquidity on the May contract at least three sessions before its expiry, and the outsized influence of the United States Oil Fund, which at one point held a quarter of WTI’s front-month contracts.

Though many of those issues have subsided to a degree, worries that WTI could turn negative have again emerged. As reported by Reuters, in a letter circulated to brokers, exchanges and clearing houses, the U.S. Commodity Futures Trading Commission (CFTC) has warned that oil prices still have the potential to turn negative.

Speaking of this letter, Reuters columnist John Kemp pointed out that:

‘The Commission’s decision to issue a public caution illustrates the depth of concern about what happened in the run-up to the expiry of the May futures contract, and determination it must not be allowed to happen again.’

The CFTC itself warned that brokers, exchanges and clearing houses ‘are expected to prepare for the possibility that certain contracts may continue to experience extreme market volatility, low liquidity and possibly negative pricing.’

Elsewhere, the CFTC also stressed that those institutions must ensure that the market is free from ‘manipulation, price distortion, and disruptions of the delivery or cash-settlement process.’

The WTI June, front-month futures contract is set to expire next Tuesday, 19 May.

WTI and Brent Crude prices in focus

Ultimately, even as concerns over the stability of oil markets remain in focus, oil prices across the board have traded with greater levels of stability over the last month.

For example, WTI's June NYMEX contract last traded at US$27.62 a barrel; while Brent's July ICE contract last traded at US$31.40 a barrel – taking both benchmark contracts well off their April lows.

Other concerns, particularly as they relate to US crude storage capacity also looks to have lessened in recent weeks, with UBS this week writing that:

‘US commercial crude oil inventories continued to show an accelerating slowdown in the pace of the build, actually falling by 745-k b/d to 531-m bbls, compared to Bloomberg median survey expectations for a 4.3-m bbls stockbuild.’

Speaking of Brent – the international oil benchmark – UBS analysts also positively said:

‘All in all, we believe the worst of the demand shock is now behind us, now forecasting ~15.7-m b/d of 2Q real demand loss and some 1.85-m b/d of incremental apparent demand loss from inventory destocking.’

How to trade oil markets: long and short

What do you make of the current situation: do you see bullish or bearish opportunities? Whatever your opinion, you can trade WTI spot and futures, as well as Brent spot and futures – long or short – through IG’s world-class trading platform now.

For example, to buy (long) or sell (short) WTI spot using CFDs, follow these easy steps:

  1. Create an IG Trading Account or log in to your existing account
  2. Enter ‘Oil - US Crude’ in the search bar and select it
  3. Choose your position size
  4. Click on ‘buy’ or ‘sell’ in the deal ticket
  5. Confirm the trade

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.

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