FxWirePro: Tour With CFTC Chair On WTI Crude Futures In Negative Territory And Hedging Review

WTI crude futures have slid in negative zone, while spot crude prices are trading at $11.28 levels a barrel. The recent distortions on the oil market are less likely to be the cause but instead, the trigger for the market to reveal its worst fears regarding the economic extent of the corona crisis. After all, analysts seem to have agreed quite quickly following the extraordinary collapse of the oil price on the futures market that this was due to technical factors. The oil price nonetheless slipped considerably yesterday, in line with a general risk-off move on the markets.

The CFTC Chairman, Tarbert speaks with CNBC on the state of crude oil futures markets that jumps into negative territory:

“The CFTC obviously is watching these markets closely and in real time. Our main job as a regulator is to make sure that whatever is going on in the markets is actually reflective of real supply and demand and not anything else. I think when we look at this situation; it does appear to be a fundamental supply and demand issue … [I]t's not a financial markets issue at this point. Obviously we're looking into it to make sure we understand all the factors, but basically it can be explained by what's actually going on in the real markets, which obviously is a tremendous amount of dislocation with respect to storage, supply, capacity, and dramatically decreased demand. So, the markets are just simply reflecting at this point what's going on in the real economy, which obviously is a lot of volatility … The volatility that we saw yesterday—even though the WTI contract reached a historic low—we didn't see that across other commodity classes.”

Chairman Tarbert on Counterparty Risk 

“The good news here is that very few people stay in the contract when it goes into the delivery period; so, the amount of people that are actually in these markets is reduced significantly to a very small number, in some cases mainly those already hedging … That reduces counterparty risk. I’m pleased to say that all of our clearinghouses, which collect variation and initial margin payments, all variation and initial margin payments were made yesterday throughout the day, so no one missed margin payments.”

Chairman Tarbert on the Impact on Volatility 

“Because the negativity only occurred within the May-front-month contract, the volatility was actually not as extreme as the volatility that we saw last month because it went across the curve and into the curve. So today, if you look, for example, the July Brent contract and the July WTI contract are pretty tight in terms of spread, so they're not as wide as we saw yesterday. But again, time will tell.”

Foreseeing such a turmoil in the energy market contemplating dislocation in the demand/supply equation here, we had advocated shorts in CME WTI futures contracts of far-month tenors with a view to arresting further dips, since further price dips are foreseen we would like to uphold the same strategy by rolling over these contracts for May month deliveries. Courtesy: JPM