Thread by @ErikSTownsend

1/THREAD: EXACTLY *WHO* GOT SQUEEZED YESTERDAY?

Goldman says it was retail futs accounts that got caught long and wrong yesterday, causing the epic -$40 print on $CL_K. I call bullshit. This thread is to discuss why that's nonsense and what really happeend.

#OOTT @Big_Orrin

@Big_Orrin 2/ First let's debunk Goldman's ridiculous explanation. Look guys this one is simple: Retail didn't do it because they're not allowed to.

Virtually all online retail futs platforms force retails to close deliverable contract futures at least TWO days before expiry.

@Big_Orrin 3/ If you don't close your nearing-expiry position, they close it for you.

Believe me, I trade a systematic strategy that relies on trading to 2nd to last day, so I know from experience how much negotiation is required to open a retail account that allows holding futs that long.

4/ Yeah, sure, there are probably a couple of brokers that don't have or don't strictly enforce this rule. But no way 100K longs were in the hands of ignorant retails whose brokers forgot to hold them to the rules. That's just not a credible explanation!

5/ But I do think it behooves us to try and figure this out so we can try and figure out what to expect next month. My goal in posting this thread is to invite conversation from people who know what they are talking about to see if we can jointly figure it out.

6/ I'll start the conversation with my own hypothesis, admittedly pure conjecture.

Cushing is REPORTEDLY still way below tank tops. What's not in the report is the fact that that space was already spoken for.

I speculate that this is really all about the KM spread breaking to

7/ record wides on Sunday night, long before the flat price went negative.

My guess is some funds or experienced pro oil traders saw that spread blowing past $12 (prior record was 8.79) in the overnight session, and said "Ok, this is just too good to be true. ARB THAT BITCH!

8/ So they bought the KM spread in the overnight session at record wides. Their plan was to get on the phone first thing in the AM and make arrangements to take in-tank delivery and just pay thru the nose for storage for a month. They figured there is still space in Cushing and

9/ with such a wide spread, they could afford to pay whatever the ask was. They only needed one month in-tank storage.

Then morning came, and they were laughed at. Storage? Who are you kidding?

They spent most of the day in a panic trying to buy storage for a month at ANY

10/ PRICE, and were told there is none. Around 1pm then realized they had no choice but to unwind their arb at a big loss. And that's when the shit hit the fan.

This is total conjecture on my part. I'm just trying to piece together a plausible explanation for -$40 prices.

11/ The IMPORTANT part of this discussion is what it means looking ahead to next month's roll.

Seems clear to me that whether my story is true or something else explains it, either way it's pretty damned clear that there just isn't any storage or pipe capacity out of Cushing

12/ available for immediate purchase at any price. IF ANYONE READING CAN VERIFY THAT SPECULATION authoritatively, I'd love confirmation. But I just can't fathom how this possibly could have happened if storage was available for purchase.

13/ I suppose the other explanation is some institutional investors aren't really all that bright, and maybe this was just a macro fund or someone not all that well versed in oil markets who bought the dip on Sunday night and got caught long.

But I just can't reconcile that

14/ explanation with everything I know about stupid people in institutions.

The whole market rolls their positions mostly during the exchange-recommended roll period a week ahead of time.

EVERYBODY knows that position limits become effective on OPEX day, and most

15/ all institutional traders (NOT including physical oil market pros) make a policy of always being COMPLETELY out of the expiring contract before 2:30pm on OPEX day, when the 3k position limits take effect.

So the ONLY way this could happen would be for enough people

16/ with futures accounts that ALLOW holding till the day before expiry (Read: almost entirely institutional accounts) somehow decided to stay long (or more likely buy the dip in) the K contract AFTER OPEX and position limits became effective.

Who the hell would do that other

17/ than someone who was consciously and intentionally playing the KM spread, thinking they could take delivery to arb it?

Seriously, WHO could have stayed long past OPEX? Retails are certainly stupid enough to do that, but their brokers are smart enough not to allow them to.

18/ So it had to be an institutional trader who for some reason couldn't resist buying (or continuing to hold) K even after OPEX and pos limits.

I'm racking my brain, and just can't think of any other scenario than somebody THOUGHT they could take delivery, then figured out

19/ mid-day on Monday that they couldn't get storage, and was then squeezed out of their long KM spreads.

Can anyone think of another explanation for why someone who HAS AN ACCOUNT THAT IS ALLOWED TO HOLD THAT LONG would do so?

20/ Looking ahead, what caused the overnight crash in M to $12, and what does it portend for next month's roll?

My initial hypothesis is that big institutional longs are finally taking a fresh look at the long-ingrained practice of always holding the front month contract

21/ until a few days before OPEX. They have done it that way for years for precisely one reason: That's what they're used to, that's what everyone else does, and they had no reason to question the practice or consider alternatives.

But now they are thinking "Shit. I don't really

22/ understand WTF just happened to the front-month K contract going negative before expiry. I'm not smart enough to figure that shit out.

But I am smart enough to realize that M is the new front month, and I own it in size. That means I own shit I don't understand completely

23/ and my institutional investor brain tells me that crazy negative pricing shit happening for the first time ever doesn't get people fired because nobody saw it coming, but being the guy who held the NEW front month until it happes AGAIN definitely WILL get me fired! Fuck this.

24/ So I speculate that after Europe opened and there was more liquidity, some big players started rolling their M contracts forward - not necessarily to N but possibly all the way to Z or later.

After all, the reason they are long is not because they think RIGHT NOW is

25/ crude oil's "moment". They just wanted to buy low and hold it till the crisis is over.

After witnessing what happened to K yesterday, they decided "Fuck this being exposed to the front of the curve shit! I'll eat the contango and just move my long to a liquid long-dated

26/ contract.

To know whether this PURE SPECULATION ON MY PART has any basis in fact requires some in-depth OI analysis. I don't get live OI - only end of day. So can't analyze whether I'm right until after today's close.

(Does anyone get live OI updates?)

27/ Ok, this thread has gone on long enough. @phemsworth @Bruce_Urquhart @Big_Orrin what do you guys think?

/END THREAD