US oil prices fell sharply on Monday after the world’s largest exchange-traded fund began unloading all of its short-term contracts, fearing another plunge into negative territory.
West Texas Intermediate, the benchmark oil price in the United States, fell below $ 0 last week for the first time in response to a collapse in global fuel demand triggered by the coronavirus pandemic.
The benchmark has recovered since the fall of last week, when sellers paid buyers to take the oil from them and return to positive territory.
But it fell sharply again on Monday when the US Petroleum Fund, the world’s largest oil ETF, said it would sell all of its oil delivery futures in June – 20% of its $ 3.6 billion portfolio. dollars – over a four-day period. WTI fell 27.7% to $ 12.25 a barrel following regulatory filing by the fund.
The past fall highlights how speculative trade can disrupt an increasingly fragile oil market when demand for this plentiful commodity is so depressed.
Oil futures are not traded like stocks because contracts expire every month with buyers physically taking delivery of the crude. Last week, the drop in negative prices occurred the day before the May WTI contract expired, with the June contract now the most actively negotiated.
“By selling shorter future contracts and investing in longer contracts, they are putting pressure on the WTI contract,” said Giovanni Staunovo, commodity analyst at UBS.
The USO said it took the step because of “changing market conditions, levels of regulatory responsibility and position limits imposed on the US with respect to oil futures contracts.”
The move reflects growing concerns from regulators and the CME group, the futures market, about the size of the USO’s positions in benchmark futures, as falling below zero could wipe out. investor funds.
The CME imposed limits on the amount that USO can hold in the June contract, as well as in the following months. Twice this month, he told the USO not to exceed “levels of responsibility” in certain types of oil futures contracts.
Last week, CME said that USO could not take a long position over 15,000 contracts for June, more than 78,000 in July, 50,000 in August and 35,000 in September. The fund had 150,000 contracts in June before Monday. The CME declined to comment further.
The dire shortage of available oil storage in Cushing, Oklahoma – a key oil storage hub for American shales – has put particularly heavy pressure on US oil prices. With little space to store oil, potential buyers are wary of buying more raw materials than they need.
But the downward pressure on prices is evident worldwide. The international price of Brent crude, less constrained by storage problems, fell to $ 19.62 a barrel on Monday, down 8.5%. ICE Futures Europe, which operates the Brent benchmark contract, declined to comment.
Some analysts have said that imposing restrictions on short-term futures trading would do little to lessen the turmoil in the US crude markets.
“Brokers who restrict trading in widows’ oil futures manufacturers will tend to reduce liquidity and increase volatility,” said Paul Sankey, managing director of Mizuho Securities.
In the absence of major reductions in production volumes to reduce congestion in storage centers, some fear a lasting disruption in the world market.
Oil production has already started to weaken due to falling prices. Drillers cut 60 oil rigs in service during the week of April 24, reducing the total to 378, the lowest since July 2016, according to a regular report released Friday by energy service company Baker Hughes.
Saudi Arabia is also slashing production, ahead of the cuts agreed by Opec and fellow producers which are slated to start on May 1.
Analysts said the cuts had not been enough to offset the huge blow to oil consumption by measures to prevent the spread of Covid-19. Commodity trading houses say demand could drop 30% as many economies have actually closed.
“The oil market is still heavily supplied,” said Staunovo. “There are more reports of the increase in stocks. With this, more places are running out of storage, so we have to see the production stoppages. “