It's a Lonely Front Month for WTI Futures

CME Group orders USO to shrink June and July WTI futures position
Global market may start rebalancing in Q3/Q4
OK's Governor Stitt asks Trump for help
The Energy Report

The Energy Report


The Phil Flynn Energy Report 

Drain the Oil Swamp

The front-month WTI futures contract is becoming a very lonely place. Fears that storage will top out and predictions of another assault on negative oil prices are making firms and exchanges force the hand of participants and pressure them to exit the market.

Reuters reported that CME Group ordered the USO ETF to reduce its holdings of WTI futures contracts in June and July, which USO announced yesterday in a filing with the SEC. They report that sales will be completed between Monday and Thursday. Because the USO has become a forced seller, potential buyers and market makers have marked down their bid prices, knowing USO will still have to accept some of them, which is what has created a renewed drop in WTI prices on Monday, this time for contracts with June and, to some extent, July delivery dates.

Yet it’s not just the USO ETF that is being pressured to exit the market. S&P, Dow Jones, GSCI, commodity index, told clients to roll their exposure out of the June WTI crude oil futures into July with immediate effect due to the risk of negative oil prices for the June contract. Many clearing houses are making healthy suggestions, if not outright denial of trading privileges, in the front-month WTI future as fear of unprecedented volatility might smash both the bulls and the bears in oil. They even fear short positions because of the potential for sharp snap-back swings on low volatility. After the USO gets out, the front-month crude contract might look as desolate as the eerie empty streets of downtown Chicago. 

The Russian Energy Minister, Alexander Novak, is predicting that the global oil market may start re-balancing in the second half of the year. He said he’s counting on the oil market  to work out the imbalance starting from next month once the OPEC+  deal goes into effect. Yet at the same time, he isn’t looking for a sharp increase in oil prices.

Reuters is reporting that, "Oklahoma's governor has called on U.S. President Donald Trump to declare the coronavirus pandemic an ‘act of God,’ a step to help oil-producing states contend with a crude glut that caused futures prices to close below $0 last week. "Over-production of oil continues to threaten the economy," Governor J. Kevin Stitt said in a letter to Trump that Stitt posted on Twitter late on Saturday.

Oil spreads and options may be the way to go. The market is still pricing in demand coming back and production tanking by the end of the year. Volatility may make some more exotic spreads very interesting.

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About the Author

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor.