WTI outlook: why oil prices could go negative again

We examine why some analysts believe oil volatility may be set to increase in the short-term.

Volatility ratcheted up in US oil markets overnight – after the US$3.25 billion United States Oil Fund (USO) disclosed that it would be selling all of its front-month WTI futures contracts – between 27 to 30 April.

USO, which typically holds a portfolio of front and longer dated WTI Nymex and ICE futures contracts, has been named as a key contributor to the recent oil market volatility. Indeed, in the week leading up to WTI’s historic descent into negative territory, the fund was said to have been holding as much as 25% of U.S. crude’s front-month (May) contracts, according to Bloomberg.

At its most pronounced, the WTI May futures contract hit negative US$40.32 a barrel – as liquidity collapsed and investors clamoured to exit their positions at whatever the cost.

As Roger Lowenstein wrote, musing on the work of Keynes:

‘There cannot be "liquidity" for the community as a whole. The mistake is in thinking that markets have a duty to stay liquid or that buyers will always be present to accommodate sellers.’

Dwindling U.S. crude storage have also played a key role in WTI’s plunge, with concerns mounting that Oklahoma’s Cushing facility (as well as the U.S. more broadly) will soon reach capacity.

The U.S. Energy Information Administration (EIA) is set to release its next Weekly U.S. and regional crude oil stocks and working storage capacity report on 29 April.

Oil prices collapse again, USO shifts its focus

In response to the unprecedented price swings within oil markets, USO yesterday revealed that it was planning on reweighting its exposure towards the back-end of the futures curve.

Specifically, the fund said it would begin rolling over all of its front-month, June WTI contracts on 27, 28 and 30 April, 2020 – reducing its exposure by approximately 33.3% each day.

The response was a violent and pronounced one in U.S. oil markets. After four sessions of relative calm, WTI’s Nymex June contract plunged yesterday, falling US$4.16, or 24.56%, to close out the session at US$12.78 a barrel.

At the time of writing, WTI futures continued to trend lower, last trading at US$11.73 a barrel. Brent’s ICE June contract was also down, last trading at US$19.460 a barrel.

Going forward, USO noted in its latest regulatory filing, dated 27 April, that its fund would approximately be composed as follows:

  • 30% in the second month, July contract
  • 15% in the August contract
  • 15% in the September contract
  • 15% in the October contract
  • 15% in the December contract
  • 10% in the June 2021 contract

By comparison, on 24 April, USO noted that its fund would be approximately composed as follows:

  • 20% in the front-month, June contract
  • 50% in the July contract
  • 20% in the August contract
  • 10% in the September contract

Will WTI oil prices go negative again?

In short, analyst think it’s a distinct possibility.

According to Jeff Currie, Global Head of Commodities Research at Goldman Sachs, ‘The fundamental story of negative prices — that can absolutely play out again.’

Here, Mr Currie stressed that:

‘This happened over and over in '09. The odds of it happening again but from a fundamental perspective as we go into June expiration is quite high.’

Paul Sankey, from Mizuho Securities, went even further than Mr Currie – spectacularly postulating that WTI's June contract could possibly go as low as negative US$100 a barrel.

‘We have clearly gone to full scale day-to-day market management crisis, and as we said when we first called for negative prices, the physical reality of oil is that it is difficult to handle, volatile, potentially polluting, and actually useless without a refinery,’ Mr Sankey said.

Elsewhere, John Kilduff from Again Capital recently told Bloomberg that while ‘Some of this downward pressure particularly in the June contract is an increasing lack of liquidity,’ price volatility has also been exacerbated by brokers ‘restricting client’s abilities to add new positions to certain crude contracts.’

The Bank of China, for example suspended trading in its Crude Oil Treasure product, after its retail clients incurred significant losses, estimated at around US$1 billion.

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:

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

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The information/research herein is prepared by IG Asia Pte Ltd (IGA) and its foreign affiliated companies (collectively known as the IG Group) and is intended for general circulation only. It does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. You should take into account your specific investment objectives, financial situation, and particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit.

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