» » Valor View – WTI Futures go negative on 4.20 – A deep dive

Valor View – WTI Futures go negative on 4.20 – A deep dive

  • Over the weekend, news started to come out that Hin Leong, a major trader of oil products in Singapore filed for bankruptcy. A subsidiary of Hin Leong, Ocean Tankers, which owned a fleet of more than 100 vessels (including 14 VLCCs) also filed for bankruptcy (1)
  • Hin Leong had assets of $700 million against liabilities of $4+ billion and it was reported that they had been hiding losses for many years
  • We are not sure how much this news affected trading but it certainly could have had an impact in the market with everyone trying to find out their exposure to them over the weekend
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Hin Leong Group Overview
  • In the last few days before a contract's expiry, financial players generally stay away from the prompt contract (WTI May in this case) as they are not set up to take or make delivery. Hence, the trading is thin in the contract with mostly physical players squaring up their positions
  • Monday (420) was WTI CSO expiry as well and as per CME records, it still had decent open interest on the May/June -$6.00 strike with the spread around -$7.00
  • The day started with selling pressure on May contract and widening of the May/June spread
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WPPB Image Addons
  • It appeared that CME was having trouble finding buyers of the contract. Many market makers have said that CME was asking them to place bids on the May contract
  • CME opened the Pandora's box when it sent out a communique in the middle of the day that WTI contract prices can go negative as well. WTI May futures really started to nose dive after this announcement.
  • CME claims that it has been preparing for an eventuality like this since early April. Clearly, not many participants were ready for negative prices on the main index
  • Some market participants such as Continental resources are asking CFTC to look into the issue
  • CME already has a daily average pricing contract and Average Price Options (CS contract) which is used by the major players to hedge their production. This contract is only a daily average though and not weighted by volumes, if that is what Mr Hamm means by daily weighted average.
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  • Even the major market participants were not ready negative WTI futures prices. We know first hand that a large online brokerage firm Interactive Brokers (IBKR) stopped displaying bid/ask/last prices for WTI May futures once they went negative. If traders could not even see the bid/ask how could they trade it.
  • Generally, a few days before expiry traders on the platform are encouraged to take their positions off, if they are not set up to take delivery. However, it seems that traders were long the WTI May contract on IBKR and some of them ended up losing their entire capital on forced liquidation by IBKR
  • IBKR has taken a $88 million loss on these positions which lost more than their equity capital (2)
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  • Another disaster in the making and adding to the WTI misery has been the USO ETF. Retail money has been piling into USO trying to buy the cheap or negative Oil.
  • Following chart shows the popularity of USO among users of Robinhood, a $0 online brokerage popular with millenials
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  • USO had so much money inflow that it had to temporarily suspend new share creation and had to go to SEC to increase the number of units it can issue
  • The problem it created was that USO ETF became the holder of 25% of the Open Interest in the WTI June contract.
  • When WTI May futures contract traded negative on Monday, it became unclear what happens with an ETF if the underlying contracts in the ETF go negative.
  • In an already volatile market, USO management decided to roll it's WTI June contract to July and August further creating chaos on Tuesday.
  • By Tuesday, the WTI May contract had returned back to positive territory, but this unscheduled roll and net selling by USO took the WTI June contract from $20+ to a low of $6.50 on the day. Retail investors lost billions in the ETF in a single day.
  • News outlets have been pointing to the fact that storage capacity is getting full which led to negative WTI futures. However, they are not full yet, they are all leased out but not full. if they were really full WTI May contract would not have become positive the next day.
  • Surely, if storage truly becomes full, WTI prices can go negative again. However, it is a combination of factors that created this "rogue wave"  on a day (4.20) that will be remembered and talked abut for generations.
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