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James Hyerczyk

U.S. West Texas Intermediate and international-benchmark Brent crude oil prices are trading mixed shortly before the regular session opening after clawing back earlier losses. Earlier in the session, oil prices plunged for a second day in a row on concerns about dwindling global capacity to store more crude and fears that demand may be slow to recover even after countries ease restrictions to combat the coronavirus pandemic.

At 09:47 GMT, June WTI crude oil is trading $12.04, down $0.74 or -5.79%. Earlier in the session, the market hit a low price of $10.07. June Brent crude oil is trading $20.33, +0.34 or +1.70%. Its intraday low is $18.73.

Oil ETFs Dumping Front-Month Futures

Although fears about dwindling global storage capacity and demand destruction from the coronavirus are the main catalysts behind the recent selling pressure, investor “housekeeping’ also influenced the trade.

The “housekeeping” was initiated by the United States Oil Fund (USO), which dropped more than 15% on Monday after it announced its latest structural change in a desperate attempt to stay above water.

With losses mounting in the fund because of its exposure to long crude oil futures contracts, the fund’s administrator said that over the next three days the USO will sell all of its West Texas Intermediate contracts for June delivery, in favor of longer-term contracts.

The fund’s rough breakdown will now be as follows:  30% July contract, 15% August contract, 15% September contract, 15% October contract, 15% December contract and 10% in the June 2021 contract, according to CNBC.

The fundamental problem with the ETF is that it is essentially mandated to be long crude oil futures during one of the most bearish times in its history. Furthermore, it can’t take delivery of the oil either. Finally, it’s just a big bet that crude oil will recover quickly once the economy ends its shutdown, but this may not be the case.

“There are times in life where people know that there’s an instrument that is faulty, and they can shoot against that instrument and bury these people,” CNBC’s Jim Cramer said Monday.

“There is this financial problem:  people who are buying the USO, they are financial people so if you’re a real person or you’re a large contractor, a large player … they can wipe out the USO. And I think that’s been what’s going on. It’s not a conspiracy, it’s a reality. When you have an organization that can’t take delivery, well you should crush that organization every time, and that’s what probably happened,” he added.

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Daily Forecast

With USO telegraphing their intentions to sell their June positions, the market had to go down. Once they are done with their selling then this will open up the door for profit-taking and likely fuel a strong short-covering rally. This may be what we are seeing on Tuesday.

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