Thread by @amitgupta0310

Thread on

(a) why May WTI #Crude traded negative last night?
(b) what's retail piling longs on Oil ETFs
(c) The way forward.

It costs Dollars to store Oil. But currently there is lack of demand (Virus scare, Airlines down, cities lockdown, Borders sealed etc).

So the oil extracted from the fields need to be stored up. But there is a limit to storage.

That space is filling up fast in the past month. Little options left to store.

Now, WTI Crude (CL) is a deliverable contract which means you need to take delivery if holding a position on expiry (which is today, 21 April at NYMEX in US)

Delivery point is Cushing, Oklahoma

In the final few days of trading most volume switches over to the next contract (in this case in the June contract).

FYI, May contract had ONLY 5% Open interest across contracts as far as Dec 2021.

This happens every month with little drama. But this time it was different.

Traders holding May CL contract who had long positions was looking at exit, was not able to sell, no storage positions available.

So had to sell at any price. Even if the price is negative.

This is trading part of the story.

What is Ominious is that most physical delivery points in US are negative now, deep in red.

Another side to the story is how retail traders are piling up on oil trading. Specifically in Oil ETFs - Particularly USO (This is a 1 day ETF to play oil move)

Blame it on virus lockdown, but retail volumes are skyrocketing as trading desks are working scantly, retail full on.

Retail money was buying on the belief that they were buying oil at $1 or -$10 or whatever the lows were (Alike penny stock trading)

But they weren't buying May oil. They were buying June, which is trading at $21.12 (because expiry today and rollovers not happening)

Situation was so bad that USO had to file intraday to authorize an increase to shares outstanding to 4 bn

That's after a surge above 1 bn since 9th March (Saudi Antics day) and from 120 mn at the start of the year

This ETF now has 27% of June contracts.

Retail traders are convinced that since Crude will rise (lockdown opening up etc), they will make solid money.

June is trading ~$22 and Dec 2020 at ~35$

The reality is negative rollovers in such ETFs kill trading.

A common perception is that this is only an issue in the May contract and June contract is down but overall doing fine.

That's where the catch is : Who is really expecting to have to pay ~$22 per barrel to buy it in a month.

May contract is the real demand. Current demand. One really thinks that if May trades at -40$, someone will be paying 60$ more for June contract.

What ultimately matters is what one will pay for oil on the ground and this implosion is revealing that no one wants it.

This will have an impact on equity markets. Some Oil funds are likely to blow up. Someone must be holding the bag of crap.

One fund in Singapore already declared bankruptcy yesterday.

CME is likely to increase margins and that's like to cause another short squeeze.

Trump has tweeted to buy Oil to increase strategic reserves. Saudi Arabia, OPEC are considering cutting oil output ASAP, not waiting until May

"Something has to be done about the bloodbath"

One final thing : Most People think how commodity can be negative yielding.

Well, last year NG went negative at many delivery points in US. Before that, nobody could comprehend it.

Bond yields also went negative few years ago and was treated with same disdain.

Fact is : When there is more oil than people can store, you have to pay someone to get rid of it.

If you have it and don't want it, it's a big problem to get rid of it.

End of thread.