US crude prices tumble as world’s largest oil ETF cuts stake

US oil prices fell sharply on Monday after the world’s largest oil-backed exchange traded fund began offloading all its short term contracts on fears of another plunge into negative territory.

West Texas Intermediate, the US oil price benchmark, fell below $0 last week for the first time ever in response to the slump in global demand for fuel triggered by the coronavirus pandemic.

The benchmark has recovered since last week’s fall, when sellers were paying buyers to take oil off their hands, moving back into positive territory.

But it fell sharply again on Monday when United States Oil Fund, the largest oil ETF, said it would sell all its futures contracts for the delivery of oil in June — 20 per cent of its $3.6bn portfolio — over a four-day period. WTI settled about 25 per cent lower at $12.78 a barrel, following the regulatory filing by the fund.

The latest fall underscores how speculative trading can disrupt an increasingly fragile oil market while demand for the plentiful commodity is so depressed.

Oil futures do not trade like equities because contracts expire each month as buyers take physical delivery of the crude. Last week’s plunge to negative prices came the day before the May WTI contract expired, with the June contract now the most actively traded.

“By selling shorter-dated future contracts and investing into longer-dated contracts, they are putting pressure on the front WTI contract,” said Giovanni Staunovo, a commodities analyst at UBS.

USO said it made the move due to “evolving market conditions, regulatory accountability levels and position limits being imposed on USO with respect to oil futures contracts”.

Its move reflects growing concerns from regulators and the CME Group, the futures exchange, about the size of USO’s positions in benchmark futures contracts, given that a drop below zero risks wiping out investors’ funds.

The CME has imposed limits on the amount that USO can hold in the June contract, as well as in subsequent months. Twice this month, it has told USO not to exceed “accountability levels” in some types of oil futures.

Last week CME said USO could not take a long position of more than 15,000 contracts for June, of more than 78,000 in July, 50,000 in August and 35,000 in September. The fund had 150,000 June contracts before Monday. The CME declined to comment further.

An acute lack of available oil storage at Cushing, Oklahoma — a key oil tank storage hub for US shale — has put especially heavy pressure on US oil prices. With little space to hold oil, potential buyers are wary of buying more of the commodity than they need.

But the downward pressure on prices is clear around the world. The international Brent crude price, which is less constrained by storage problems, dropped to $19.62 per barrel on Monday, down 8.5 per cent. ICE Futures Europe, which operates the benchmark Brent contract, declined to comment.

Some analysts said that placing restrictions on the trading of short-term futures contracts would do little to reduce turbulence in US crude markets.
“Brokers restricting trading in the widow-maker world of oil futures will tend to reduce liquidity, and potentially add further volatility,” said Paul Sankey, managing director at Mizuho Securities.

Without significant cuts to production volumes to ease congestion at storage hubs, some fear lasting disruption to the market globally.

Oil production has already begun to falter due to lower prices. Drillers cut 60 operating oil rigs in the week to April 24, reducing the total count to 378, the lowest since July 2016, according to a regular report released by energy services company Baker Hughes on Friday.

Saudi Arabia is also reported to be slashing production, ahead of cuts agreed by Opec and its fellow producers that are due to begin on May 1.

Analysts said the cuts had not been enough to compensate for the huge hit to oil consumption from measures to prevent the spread of Covid-19. Commodity trading houses say demand could drop as much as 30 per cent as many economies have in effect shut down.

“The oil market still remains strongly oversupplied,” said Mr Staunovo. “There are more reports of inventories increasing. With that, more places are running out of storage, so we need to see production shut-ins.”