Oil Futures See Overnight Implosion

Right now, as we speak, the price of oil is imploding. Specifically, West Texas Intermediate is imploding – along with some other smaller streams in North America. Curiously however, that implosion is primarily on the front month futures contract for the commodity.

You see, oil futures, along with other futures products, trade on contracts. Those contracts, for oil in particular, have a time frame of one month as a natural result of dealing in hard assets that must see delivery occur. While you can purchase what is referred to as “forward contracts” i.e., not the current contract, but a contract that expires months or years in the future, the price referred to when discussing a commodity is always pulled from the current contract, i.e. the contract that is to expire the soonest.

The last trade date for oil contracts, as a result of the implications of delivery, is the 21st of each month, when the quoted price of the commodity rolls over to the next months contract. Right now, we are in the final trading hours of the May oil contract. This contract has a last trade and settlement date of April 21, 2020, with the first delivery associated with the contract to begin on May 1, 2020. As a side note, each oil contract is for 1,000 barrels.

These dates are important to know, because sometimes the price of a commodity between the front month and the next month can have a wild disparity, as is being seen this morning for oil futures. The spread between the May and June contracts right now is the largest spread seen in history, and was as high as $10.65 this morning. What this means, is that the May contract is selling at a $10 per barrel discount relative to the June contract as of this morning.

The implication of this, is it likely means that someone, somewhere, whom is very long oil futures is being blown up right now. The likely scenario is that the trader or firm behind the implosion was likely planning on taking physical delivery of the product, but now suddenly is unable to as storage tanks for oil near capacity globally. As a result they are looking to unwind their position significantly before the current month contract arrives at its settlement date tomorrow. While we don’t currently know who it is, we likely will soon.

In fact, this blow up is likely connected in some form to Hin Leong Trading of Singapore filing for bankruptcy on Friday. One of the world’s largest oil traders, the firm also co-owns Universal Terminal with PetroChina, and has over 2.33 million cubic meters of storage for oil. With the firm filing for bankruptcy, traders are likely unable to take possession of the physical product, and as a result, were required to drop their position substantially.

While the situation for WTI oil may be bad, its far worse for Western Canadian Select. That stream, which Western Canada relies on, hit negative territory last night, dipping as low as -$0.78 in futures trading, although it has since recovered to the positive side.

How this plays out as futures contracts rollover to the next month is currently anyone’s guess, however we will be watching the events as they unfold closely.

Information for this briefing was found via ZeroHedge, Investopedia and TradingView. The author has no securities or affiliations related to any organization discussed. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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