CFTC warns of return of negative oil prices

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The US commodity regulator has issued a rare warning to brokers, stock exchanges and clearing houses, urging them to be prepared to risk that oil prices may fall below zero again.

The Commodity Futures Trading Commission advised stock exchanges to monitor their markets and remind them to “maintain rules providing for the exercise of emergency authority”, including the power to “suspend or restrict trading in any contract” if the markets become disorderly, according to a notice notice published Wednesday.

The alert comes after the US benchmark West Texas Intermediate contract dipped below $ 0 a barrel last month for the first time as buyers searched for places to store a glut of crude.

Clearing houses “should prepare for the potential that some contracts may experience significant price volatility, and that negative prices are a possibility,” the statement said.

The WTI contract for June delivery is scheduled to expire next Tuesday, hinting at the possibility of a repeat of the last two chaotic days of the May oil contract, which fell to $ 37.63 a barrel on April 20.

The move caused losses for traders and at least one futures broker, and sparked widespread criticism of an oil benchmark referenced by drillers, refiners, consumers and investors.

“We are issuing this advisory in the wake of unusually high volatility and negative prices experienced in the May 2020 West Texas Intermediate (WTI), Light Sweet Crude Oil Futures contract on April 20,” said the eight-page advisory. signed by the leaders of the CFTC. market surveillance, clearing and risk, as well as surveillance of brokers and intermediaries.

A senior CFTC official said his opinion applied to all contracts, not just oil, and did not represent a forecast of a return to negative oil prices. “We don’t predict the market. We are simply suggesting planning, ”said the manager.

Brokers should carefully monitor contracts as they near their expiration date, the agency warned, advising them to “be especially diligent in monitoring and assessing risks”.

Connecticut-based Interactive Brokers revealed a loss of $ 104 million as it made up for customers who were trapped in last month’s trade around the May WTI contract. GH Financials, another broker, has since demanded that all traders leave the first month’s energy contracts five days before their expiration.

Stock exchanges list futures contracts and operate electronic trading platforms, while clearing houses pool margin and other collateral to secure transactions. In WTI futures, the exchange and the clearing house are managed by CME Group, the world’s largest foreign exchange firm based in Chicago.

CME first warned traders and brokers of the prospect of negative oil prices on April 8. He reiterated the possibility a week later. The Intercontinental Exchange, which lists oil contracts in London, has also allowed its systems to allow negative prices.

Terry Duffy, CEO of CME, told CNBC last month that his company had worked with regulators for two weeks before announcing that negative oil prices would be allowed. “So it was no secret that this was happening to us,” he said.

CME and ICE clearing houses have also prepared for negative pricing by changing the way they calculate option pricing on the WTI benchmark.

The May contract plunged into negative territory last month as traders worried about capacity constraints at the Cushing, Oklahoma storage complex, the delivery point for WTI futures contracts.

Low prices, however, accelerated the slowdown in US oil production. Cushing’s stocks fell 3 million barrels last week to 62.4 million barrels, the US Energy Information Administration reported on Wednesday.

Additional reporting by Philip Stafford in London

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