Oil Fund’s Forced Sales Send WTI Prices Plunging Again

OILMONSTER.COM- Front-month U.S. light crude oil futures prices slumped almost 25% yesterday, the second sharp tumble in a week, after the exchange operator ordered a major commodity fund to sell some of its near-dated futures contracts.

United States Oil Fund (USO) announced to investors it would roll its current positions forward over three days between Monday and Wednesday after intervention by the Chicago Mercantile Exchange (CME).

USO positions were previously split between contracts for delivery in June (20%), July (40%), August (20%) and September (20%), after the fund had already been forced to shift them out of the front-month by recent volatility.

The fund is now shifting its positions even further forward, exiting the June contract altogether, and moving positions to July (30%), August (15%), September (15%), October (15%), December (15%) and June 2021 (10%).

USO announced its positions would be rolled forward between April 27 and April 29, with approximately one-third rolled each day, in a filing with the U.S. Securities Exchange Commission (SEC).

In its filing, the fund noted there had been “significant market volatility” as a result of the coronavirus pandemic and the recent oil volume war between Saudi Arabia and Russia.

It said positions were being rolled because of market conditions, regulatory requirements and risk-mitigation measures being imposed by the futures commission merchant that handles its trades.

Position changes came after the USO received letters from CME instructing it not to exceed new position and accountability limits for the remaining contract months in the second and third quarters.

“We cannot comment on our specific interaction with any market participant or any particular price move,” a spokesperson said in an email to Reuters.

“CME Group operates a comprehensive surveillance program - including spot month position limits and accountability levels in order to monitor any concentration concerns - to further ensure our markets function as designed, provide price discovery, and facilitate risk transfer.”

But position limits seem to have been intended to keep most of USO’s very large position in light sweet crude oil futures, also known as West Texas Intermediate (WTI), well away from contract expiry dates.

By ensuring USO’s positions remain smaller in the run-up to expiries over the next few months, regulators can minimise the risk it could be forced to sell them abruptly in order to take delivery, distorting market prices.

Courtesy: www.reuters.com