The CFTC issues a rare warning after sub-zero crude oil prices

The US commodities regulator, the Commodity Futures Trading Commission (CFTC), issued Wednesday a rare, and rather a blunt reminder to market participants of the risk of negative oil pricing. The advisory also reminded them of their responsibility to maintain orderly trading and pricing in commodities.

The CFTC’s letter on risk management and market integrity could also be construed as an unprecedented and public warning to the Chicago Mercantile Exchange (CME), the operator of the WTI crude oil futures contract. It may be recalled that on April 20, the May WTIC contract settled at minus $37.63 a barrel after a glut of crude encountered scarce storage facilities.

Crude oil’s historic push into negative territory triggered trading turmoil and sent shockwaves through the energy industry.

June WTIC contract to settle on Tuesday, May 19, 2020

The CFTC said in its staff advisory 20-17 dated May 13: “We are issuing this advisory in the wake of unusually high volatility and negative pricing experienced in the May 2020 West Texas Intermediate (WTI), Light Sweet Crude Oil Futures contract on April 20.”

However, the CFTC took care to clarify to FT that it was not predicting negative oil prices and that the notice applied to all futures contracts, not just oil.

CFTC cites turmoil from COVID-19

The CFTC said the COVID-19 pandemic and its resultant economic downturn had led to “substantially increased market volatility in key agricultural, energy, and financial sectors, including the futures and options on futures markets regulated by the Commission.”

“The impact of fundamental and technical factors has been particularly acute for contracts that call for physical delivery of the underlying commodity as demonstrated by the unprecedented price moves in certain contracts.”

CFTC’s homily to exchanges

The CFTC firmly reminded exchanges of their responsibilities under the Commodity Exchange Act. These included the onus to prevent manipulation, price distortion, and disruptions of the delivery or cash-settlement process, and to monitor the convergence between the contract price and the price of the underlying commodity.

The exchange also must “monitor the supply of the commodity and its adequacy to satisfy the delivery requirements and make a good-faith effort to resolve conditions that threaten the adequacy of supplies or the delivery process.”

CFTC’s “negative” warning to brokers and clearing houses too

The letter said for brokers: “FCMs should prepare for the potential that certain contracts may experience significant price volatility and, possibly, negative pricing. An FCM with proprietary or customer positions in such a futures contract or options on such a contract should carefully monitor the contract as it gets closer to the expiration date” to ensure obligations are met.

To clearinghouses:  “In light of recent events, DCOs should prepare for the potential that certain contracts may experience significant price volatility, and that negative pricing is a possibility.”

What’re the chances of June WTIC turning negative?

The chances of the fiasco in the May contract repeating in June are much lower, according to Reuters commodities analyst John Kemp. Traders remain skittish about storage availability at Cushing, and that’s reflecting in their futures positioning – they are moving their positions to later expiries such as July, August, and September.

Besides, prices have improved steadily over the past week in anticipation of lockdowns easing and more people driving. Also, production cuts kicked in from May 1.

All in all, the stage looks to be set for an orderly expiry.