‘Muppets v Sharks’ as retail investors feel pain of negative oil

As the first casualties of negative oil prices crawl from the wreckage of the US oil market, one of the wildest trading days in history looks to have been a one-sided fight.

Small-time retail investors and day traders, attracted to what they hoped was a one-way bet on oil’s eventual recovery from the coronavirus crisis, have emerged as some of the biggest losers from Monday’s carnage, with the world’s top commodity traders and oil funds standing victorious.

Banks and brokerages from Connecticut to China have rushed to suspend oil-linked retail funds, leaving customers nursing bruising losses following US crude’s biggest one-day crash and its first foray below zero.

US-based Interactive Brokers Group said it was taking an $88m hit after customers incurred “losses in excess of the equity in their accounts”. Bank of China, which had marketed a structured product called the “crude oil bao”, or treasure, said it was suspending its sale to new investors.

Several oil-linked exchange traded funds have also unwound or closed to new investment.

Oil traders are now joking the fight was, at least in part, “tourists versus professionals” or even “muppets versus sharks”, with the blow-up illustrating the dangers for inexperienced investors dabbling in a volatile real-world commodity.

West Texas Intermediate, the US benchmark contract, fell from almost $18 a barrel to -$37.63 over the course of the day, as traders realised there was little storage left to lease at the contract’s delivery point of Cushing, Oklahoma.

Sellers had to essentially pay buyers to take the oil off their hands before being forced to take delivery when the contract for May expired on Tuesday.

Among the winners are some of the world’s largest physical commodity traders, such as Trafigura and Mercuria, industry insiders said. The privately held companies, which trade more than 8m barrels a day between them, lease storage at Cushing, giving them a privileged vantage point over the underlying state of the market.

Trading house Vitol, the world’s largest independent oil trader, was also managing its storage at Cushing on Monday, although people familiar with the company said it was “business as usual” rather than a blowout day. The companies declined to comment.

One senior trader at a big commodity house said physical operators had been warning for weeks that storage would fill up and that on Monday they were just carrying out normal business in a highly volatile market.
“Volatility is normally good for traders but we don’t want to see anything as extreme as Monday happen again,” the trader said. “The market is becoming disorderly with inexperienced traders rushing into a commodity they don’t fully understand.” 

At least four specialised oil hedge fund managers also emerged strongly.

Doug King, head of RCMA Capital’s Merchant Commodity Fund in London, who has been betting against oil prices for much of this year, said Monday’s volatility had helped his $180m fund to a small gain so far in April, with the fund up more than 35 per cent in 2020.

“It is probably the most volatile and challenging market we’ve ever seen,” said Mr King. “A lot of people just wanted to dump the oil on Monday as they had no other option.”

Switzerland-based energy hedge fund GZC also made big gains this month, with co-founder Vincent Elbhar saying he had bought “crash puts” — options that offer protection if prices fall to very low levels — when he spotted increasing demand for oil storage in March.

In recent weeks he has “had very difficult debates with economists who’ve told me, ‘you don’t understand anything, you’re an idiot, prices cannot go negative’,” he said. “I was laughed at.” He declined to say how much his $200m fund has made.

Massar Capital Management returned about 5 per cent over Monday and Tuesday betting on the deepening discount for WTI crude for immediate delivery, said a person close to the New York-based fund. The fund, led by Marwan Younes, is now up 24 per cent in the year to date, the person said.

Pierre Andurand, who runs one of the largest remaining specialised oil funds, also increased his returns on Monday, with his riskier fund already up 153 per cent in the first quarter.

As the dust settles, retail investors have been left shaken and angry, with some complaining they were sold oil-linked products they did not fully understand

Wu Wangxin, a well-known financial commentator and trader, took to Chinese social media on Wednesday to criticise Bank of China, which had initially questioned whether Monday’s negative settlement price was real.

Mr Wu noted that the bank sometimes outshone its larger rival Industrial and Commercial Bank of China. “But today we discovered that ICBC is more professional,” he said, referring to ICBC’s decision to shift positions in its own oil product earlier.

Meanwhile, Barclays suspended any further sales of a commodity note linked to crude oil futures. People familiar with the product said they were concerned about retail investors trying to bet on an upturn in oil prices at a time of extreme volatility and risk. 

Credit Suisse also announced this week that its “3x Long Crude Oil” exchange traded note was “equal to or less than zero”. It warned potential investors that should they buy into it at any positive price they “will probably suffer a complete loss of their investment”.

“This is not a market for retail investors to be playing in unsupervised at the moment,” said Mr King at the Merchant Fund. “It’s super dangerous out there.”

Additional reporting by Derek Brower and Neil Hume in London, Don Weinland in Beijing and Gregory Meyer in New York

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