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Vladimir Zernov
Crude Oil

Oil Video 27.04.20.


Sign Of The Times – United States Oil Fund ETF Tries To Rebalance Into Longer-Dated Futures

WTI oil prices are once again under pressure as traders fear that oversupply and lack of storage could lead to a repeat of the situation with May 2020 contract which traded in the negative territory on the day before expiry.

Currently, June 2020 futures are trading below $13.00, and they have tested the $12.00 level at one point.

It is not surprising that the actively-traded United States Oil Fund ETF, which has been crushed by the recent oil price downside, is trying to rebalance its positions to include longer-dated oil contracts.

As per the recent 8-K filing, United States Oil Fund will invest about 30% of its portfolio in the July 2020 contract while the remainder of the portfolio will be invested in longer-dated futures.

Such rebalancing negatively impacts WTI June 2020 contracts both from a technical (the fund gets out of June 2020 contracts) and the psychological points of view (the fund fears that June 2020 contracts could also fall below zero).

This rebalancing is a material development for WTI, but the oil market problems may not be limited to such short-term events.

Longer-Dated Oil Futures Decline As Well

While the front month contract gets all the media attention, longer-dated WTI contracts are suffering as well. For example, July 2020 contract is trading below $19.00, September 2020 contract is trading below $24.00, while December 2020 contract is trading below $27.00.

This means that traders do not expect that oil prices will get above $30.00 by the end of this year. Oil prices have been very volatile this year so this is certainly not the market’s final call, but I’d note that traders have become more pessimistic on oil’s ability to rebound.

While the economies start to reopen, this process will be gradual and there won’t be a return to “normal” anytime soon. It looks like oil traders have previously expected a faster economic comeback and have to face a more challenging reality.

While the debt markets and equity markets enjoy upside due to various monetary stimulus measures announced by central banks and governments all over the world, oil continues to fall because it’s a physical product which has to be either consumed or stored – and the world could be running out of storage if the economic activity does not rebound in a timely fashion.

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