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Oil up but More Investors Staying Away From U.S. Crude’s Front Month

CommoditiesApr 24, 2020 03:21PM ET
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© Reuters.

By Barani Krishnan 

Investing.com - The trust deficit in the front-month contract of U.S. crude is growing, even as the market struggles to maintain its rebound.

Oil prices remained higher for a fourth-straight day on Friday, while remaining down on the week after Monday’s historic negative pricing. 

But open interest in the front-month June contract of West Texas Intermediate was already trailing that of July WTI, signaling investors’ preference for the “safer” contract that pledges to deliver oil later rather than sooner in a glutted market. It also signals that the spot contract could be in for another financial squeeze and another round of subzero prices when it comes up for expiry on May 19.

June WTI was up 44 cents, or nearly 3%, at $16.94 per barrel. For the week, it was down 7%

Brent, the London-traded global benchmark for crude, rose 46 cents, or 2%, to $20.21 by 3:20 PM ET (19:20 GMT). It was down 22% on the week. 

Since plumbing $37 below zero on Monday, WTI has managed to stay on an upward trajectory amid optimism that U.S. production was falling —   oil rigs in the country declined by 60 this week — and OPEC cuts of nearly 10 million barrels per day would kick in by May to partially offset the demand loss of some 30 million bpd from the Covid-19 pandemic.

Yet worries about another squeeze in WTI’s front month at next month’s expiry kept some at bay.

“More brokers, and not just the discount brokers, are limiting access to the first contract of oil futures,” Olivier Jakob, founder of Zug, Switzerland-based oil-risk consultancy PetroMatrix, said, referring to June WTI, which was at a discount of $5 per barrel and 25,000 lots less in open interest to July WTI.

“If open interest continues to move early out of the first month, it could be increasingly difficult for the roll of indices still having holdings of front-month futures, but as well for the delta-hedging of options,” Jakob added. “Margin requirements are also increasing to take into account the volatility seen this week.”

Igor Windisch of the IBW Oil Brief said brokerages that had told clients not to buy front-month oil included AMP Global Clearing, TradeStation Securities, INTL FCStone and Marex.

“All have imposed restrictions on their customers from taking new positions in June WTI and Brent. Margin requirements have been raised.”

Bob Yawger, director of the futures division for Mizuho, weighed in as well, saying that "(w)hen you think about some of these firms, their customers were probably not trading for size. But when you take on an aggregate amount of these folks, it adds up and you definitely lose some liquidity in the front."

Oil up but More Investors Staying Away From U.S. Crude’s Front Month
 

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Comments (3)
Randolph Craven
Randolph Craven Apr 24, 2020 5:31PM ET
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Why are we not filling our stategic oil reserves..esp at these prices. More production cuts .. immediately!!!
Gershom Zvi
Gershom Zvi Apr 24, 2020 5:31PM ET
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Absolutly however I guess no need sny more any strategic oil reserves coz looking for new kind of fuel or technology
Jordalf Labrador
Jordalf Labrador Apr 24, 2020 3:08PM ET
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the points of the stock are getting better. keep it up.
Mohamed El Saiid
Mohamed El Saiid Apr 24, 2020 2:42PM ET
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Since tuesday we have been watching the strong uptrend in oil without even a hint on any correction. As usually everything will be decided in the sunday's trading
Jay Khaye
Jay Khaye Apr 24, 2020 2:42PM ET
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Whats your guess for Sunday open?
Mohamed El Saiid
Mohamed El Saiid Apr 24, 2020 2:42PM ET
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Jay Khaye I preferred to close my position because I beware to catch a gap. Oil is looking up but a gap is possible on the next week.
Jay Khaye
Jay Khaye Apr 24, 2020 2:42PM ET
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Mohamed El Saiid  I don't trade crude directly but more into Oil company stocks.  They set it up that it can go either way and then news seems to materialize that makes your bet meaningless.  The smart trader doesn't hold over night unless he can afford to hold his position long term and knows he's going with the trend.  Otherwise the hole you dig can be to deep to crawl out.  I closed all my positions to day but was lucky with my entries and exits so overall good day.
Martin Duhaime
Martin Duhaime Apr 24, 2020 2:42PM ET
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Jay Khaye  You make a good decision if you're were long.
 
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