Oil fund’s forced sales send WTI prices plunging

LONDON: Front-month US light crude oil futures prices slumped almost 25 percent yesterday, the second sharp tumble in a week, after the exchange operator ordered a major commodity fund to sell some of its near-dated futures contracts.

United States Oil Fund (USO) announced to investors it would roll its current positions forward over three days between Monday and Wednesday after intervention by the Chicago Mercantile Exchange (CME). USO positions were previously split between contracts for delivery in June (20 percent), July (40 percent), August (20 percent) and September (20 percent), after the fund had already been forced to shift them out of the front-month by recent volatility.

The fund is now shifting its positions even further forward, exiting the June contract altogether, and moving positions to July (30 percent), August (15 percent), September (15 percent), October (15 percent), December (15 percent) and June 2021 (10 percent).

USO announced its positions would be rolled forward between April 27 and April 29, with approximately one-third rolled each day, in a filing with the US Securities Exchange Commission (SEC). In its filing, the fund noted there had been “significant market volatility” as a result of the coronavirus pandemic and the recent oil volume war between Saudi Arabia and Russia. It said positions were being rolled because of market conditions, regulatory requirements and risk-mitigation measures being imposed by the futures commission merchant that handles its trades.

Position changes came after the USO received letters from CME instructing it not to exceed new position and accountability limits for the remaining contract months in the second and third quarters.

“We cannot comment on our specific interaction with any market participant or any particular price move,” a spokesperson said in an email to Reuters. “CME Group operates a comprehensive surveillance program - including spot month position limits and accountability levels in order to monitor any concentration concerns - to further ensure our markets function as designed, provide price discovery, and facilitate risk transfer.” But position limits seem to have been intended to keep most of USO’s very large position in light sweet crude oil futures, also known as West Texas Intermediate (WTI), well away from contract expiry dates.

By ensuring USO’s positions remain smaller in the run-up to expiries over the next few months, regulators can minimize the risk it could be forced to sell them abruptly in order to avoid taking delivery, distorting market prices.

USO was not involved in the sudden plunge in WTI prices in the May contract on April 20, a day before it expired, because the fund had already rolled its positions forward several days earlier. But regulators seem keen to ensure USO’s large and well known positions do not become a cause of dislocations in future (“United States Oil Fund LP Form 8-K”, SEC, April 27). Ironically, the intervention, however well intentioned, has increased volatility in the short term, even if it could lessen volatility later on. — Reuters