In late April this year, Wet Texas Intermediate nosedived below zero, sending the market into a frenzy. The frenzy ended a day later when WTI rebounded to positive territory. Now, the Commodity Futures Trading Commission has issued a report on the unprecedented event. Still, it has failed to answer many questions. The report identified three fundamental factors and five technical factors that contributed to the slump in the U.S. oil benchmark. Among the fundamental ones, the CFTC identified the excess supply on global oil markets, which fused with the unprecedented demand loss resulting from the pandemic-prompted lockdowns and worries about a lack of oil storage space.
Among the technical factors, the CFTC noted the much higher-than-usual open interest in WTI near the expiry date for the May contract and a decline in the liquidity of this contract. The authority noted that on April 20, the day when WTI fell below zero, exchange-based control mechanisms had been triggered, but even they had not been enough to stymie the drop.
“In summary, a variety of factors coincided leading up to, on, and around April 20, when WTI Contract prices fell from $17.73 per barrel at the beginning of the trading session to finally settle at -$37.63 per barrel,” the CFTC said. “An oversupplied global oil market faced an unprecedented reduction in demand due to COVID-19 slowdowns and shutdowns, and the uncertainty over supply, demand, and storage capacity coincided with price volatility in the WTI Contract observed at historic levels that day.”
Related: Three Key Differences Between Biden And Trump On China Not everyone is happy with this summary, however. Reuters’ John Kemp, for instance, suggested the behavior of one or more traders may have contributed to the excessive volatility of the U.S. benchmark oil contract.
“If trading added to volatility, how significant was the contribution?” Kemp wrote. “Was the behaviour culpable? If it was not culpable, should it have been? And should either the contract’s design or supervision be changed to prevent a repetition?”
Members of the CFTC are not all satisfied with the findings of the report, either. In comments on the release of the document, Commissioner Dan M. Berkowitz said:
“The Report issued today is incomplete and inadequate. The Report fails to determine the cause of the unprecedented plunge in the price of the WTI futures contract and divergence from physical markets on April 20, the penultimate day of trading in the May contract. Rather, it provides a general recitation of economic conditions in the weeks and days leading up to April 20, and offers only aggregated statistics regarding trading on that day. Unfortunately, this Report does not provide the public with an adequate explanation for the extraordinary price collapse on April 20.”
These questions may never get answers. The report, although titled interim, will not have a follow-up, according to the CFTC. What’s more, it expressly states that its scope does not include trading activity:
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“This Report does not analyze the propriety of trading by any particular trader or group of traders. Additionally, to the extent any trading activity may have been abusive, manipulative, disruptive, or otherwise unlawful, an evaluation of that activity is beyond the scope of this Report.”
Will we ever find out exactly what happened on April 20, besides the obvious? The question remains open, as does the possibility that regulators are looking into the trading aspect of events. As the CFTC put it in a footnote: “As is customary, nothing in this Report should be interpreted to either confirm or deny the existence of an enforcement investigation by the Commission related to the matters addressed herein.”
As to whether a repeat of the events from April 20 is possible, there are two ways of looking at it. One, anything is possible, and if it has happened once, a second occurrence becomes more likely unless something in the context of this event changes. Two, the convergence of fundamental factors in April was unprecedented. A repeat of this combination—and mostly the element of surprise it carried—is quite unlikely. So, although hyper volatility in oil markets always remains a possibility, another nosedive by WTI to almost -$40 per barrel is quite improbable, even without tweaks to how commodity futures are traded.
By Irina Slav for Oilprice.com
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US shale oil drillers were unable to export their oil or sell it at home because of the pandemic. Renting storage outside would have cost them far more the contract price for their oil in the current situation. So they had to either give it away or sell it at any price.
In a nutshell, the collapse of the WTI price was a unique American affair. Still, the level of the WTI oil price collapse was very unusual.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London