Forget Turnaround Tuesday. Oil is a “dangerous market to trade in right now,” said Pierre Andurand, founder of Andurand Capital Management LLP, in a Bloomberg TV interview. The market needs shutins to happen now, he said.
“This has changed everything,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.
“So much of the recent recovery was based on the fact that the oil price had been above $50-$60, providing support to economic activity, and that’s just been decimated.”
This “price slump was psychologically very important,” said Eugen Weinberg, Commerzbank AG’s head of commodity research.
“There is a possibility it will change perceptions forever.”
The best summary of today’s chaos came from Bloomberg energy reporter Javier Blas who put it simply: “Yesterday was scary. Today is a lot more scary. The whole oil market is screaming oversupply simultaneously. June WTI, which four weeks away from expiry, just touched $6.5 a barrel. The market is going to force huge production cuts not in May or June, but immediately.”
Yesterday was scary. Today is a lot more scary. The whole oil market is screaming oversupply simultaneously. June WTI, which four weeks away from expiry, just touched $6.5 a barrel. The market is going to force huge production cuts not in May or June, but immediately | #OOTT
— Javier Blas (@JavierBlas) April 21, 2020
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Update (2300ET): There is no escaping the carnage in the crude complex as Asian futures and ETFs linked to oil prices are trading chaotically overnight.
June WTI futures are rolling back over…
Shanghai Oil Futures are ‘only’ down 10% (thanks to China’s limit-down circuit-breakers)…
China futures catching down to WTI…
The Samsung Crude Oil Futures ETF (which held more than $500 million worth of the derivatives as of April 20) has crashed 45%…
As Bloomberg reports, Samsung Asset Management (Hong Kong) Ltd, which manages the fund, said in a Tuesday exchange filing that the fund will sell its entire holdings of June oil contracts and buy September contracts. It also warned that in a “worst case scenario,” the net asset value of the fund may drop to zero and investors may suffer “a total loss” of their investments.
“There is a big tracking error after the ETF switches from tracking June futures to September futures,” said Castor Pang, head of research at Core Pacific-Yamaichi International Hong Kong.
“After the switch, the value of the ETF evaporates by more than half because of the plunge in oil futures.”
Additionally, as Bloomberg’s Ye Xie notes, because short-selling is not allowed in China, making arbitrage more difficult – several Chinese ETFs tied to crude oil prices are trading at “crazy premiums”…
As Xie so correctly concludes, until they can find the next fool to push up the ETF prices, investors need oil prices to rally a lot just for them to break even.
Good luck with that.
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Update (1435ET): With settlement now come and gone, the May contract soared back higher today…
and adjustments to the USO allocation (to June, July, and August) prompted a bid in each ahead of the settle which all then plunged back after…
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(Update 1425ET): It has been an exciting day for the USO ETF, if not so much its holders, and after growing speculation the largest oil ETF may have to follow its peer OIL and liquidate, moments ago USO was halted again, this time announcing that it has moved 5% of its futures into the August WTI contract, stating that it may invest in any month available due to market conditions, and warning that it may see significant deviations from its benchmark.
- USO SAYS IT HAS MOVED SOME WTI HOLDINGS INTO AUGUST CONTRACT
- USO: MAY INVEST IN ANY MONTH AVAILABLE DUE TO MARKET CONDITIONS
- USO SAYS MAY SEE SIGNIFICANT DEVIATIONS FROM ITS BENCHMARK
- USO HAS ABOUT 40% OF HOLDINGS IN JUNE CRUDE FUTURES CONTRACTS
- USO HAS ABOUT 55% OF HOLDINGS IN JULY CRUDE FUTURES CONTRACTS
— ForexLive (@ForexLive) April 21, 2020
All of this real-time jiggering with the terms of the USO to avoid going under just goes to show that ETFs, and passive investing in general, are products geared exclusively to bull markets and promptly implode when there is a downdraft in risk assets.
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Update (1345ET): Here we go again. June WTI is now crashing – trading below $7 – down over 65% on the day…
And July is crashing, down over 30%, below $18…
Remember the settle occurs at 1430ET (and the expiry of the May contract)… and the prompt spread (May-June) has surged back to zero…
USO is also testing pre-market lows as retail and the roll panic out…
“A lot of retailer investors are looking at it and realizing that they are losing money hand over fist,” Tariq Zahir, commodity fund manager at New York-based Tyche Capital Advisors LLC said.
“It’s undeniable that the USO is having a having a very big effect on the June contract and it wouldn’t be surprising if we go substantially lower.”
* * *
Forget Turnaround Tuesday, paper oil markets are collapsing once again with USO halted numerous times, OIL liquidated, and June futures puking hard in a repeat of yesterday’s May contract bloodbath…
May is rallying here as June crashes… (we suspect more ETF rolls)…
Sending the prompt spread soaring back…
But June is now down a shocking 45% to a $10 handle… and there is still 90 minutes until settlement.
Yesterday, the break of $10 was what sparked the waterfall in the May contract.
USO is down 30%…
Here are five analysts’ views on what’s happening in the world’s largest oil ETF…
Dave Lutz, macro strategist at JonesTrading:
“Retail investors should have a way to trade the price of oil, but USO has such problems with the roll effect that I’m not sure that’s the best vehicle. Problem is, it’s really the only one,” he said. In addition, “the fact that creations are suspended means that this is no longer going to track properly.”
Joseph Saluzzi, Themis Trading LLC partner and co-head of equity trading:
“Some ETFs are not exactly what you think they are — the rule for any investor is to know what you own. Some folks may have thought that USO was simply a proxy for the current oil price, and they didn’t really understand the mechanics of the oil futures market.”
Matt Maley, equity strategist at Miller Tabak + Co.:
“There is no question that this is a tool for investors of all sizes to bet on the price of oil. Many of these investors — again, of all sizes — have tried to pick the bottom in oil several times over the past week or two and they’ve all gotten burned. This has caused these buyers on weakness to become forced sellers. When the dust settles, it’s going to create an unbelievable opportunity for buyers. Until we get a better feeling of when the demand side of the supply/demand equation is going to improve, it tells me that the risks are still much too high compared to the potential rewards,” said Maley.
“I worry that it’s going to have a negative impact on liquidity in the oil markets, and thus have a negative impact on confidence in that market.”
Jeremy Senderowicz, a partner at law firm Dechert:
“Once creations are suspended then the arbitrage process cannot work as normal, as new shares cannot be created to meet increased demand,” he said.
“The 8-K says they are suspending creations because they’ve used up all the shares they’ve registered (they filed yesterday to register more shares but the SEC needs to declare it effective and they haven’t done so yet). That indicates that demand for the shares was quite high. If that demand continues, then until new shares can be created you can fill in the blank as to what might happen in trading…(which may be why they had the trading halt). That seems like the big takeaway to me.”
Dan Genter, CEO of RNC Genter Capital Management:
“The ETFs that are dealing with the contracts in the commodities are never going to take physical delivery, they can’t take it. There’s not a doubt the oil ETFs distorted the market. It was across the board but the ETFs, in our opinion, were the biggest problem,” he said. “The panic is because there are people invested in that commodity and in the contracts that not only have no intention of taking delivery, they have no capacity for taking delivery. All of a sudden, you’re up against a wall. They call it a contract for a reason.”
But, don;t worry, because President Trump will take the pain way… right?
Tue, 04/21/2020 – 23:21
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Author: Tyler Durden