Oil prices dip again as ETF dumps futures contracts

Oil prices dip again as ETF dumps futures contracts

Oil prices went down once again on Monday, albeit stopping short of going negative this time around as EFT reportedly dumps futures contracts.

The latest dip on oil prices stemmed from the unprecedented wholesale liquidation of short-term futures contracts by leading ETF United States Oil Fund (USO).

The ETF announced through its fund manager USCF that it was going to sell off all short-term contracts by April 29. USO will then shift its focus to speculative trading in contracts at least a quarter ahead of current trades.

A shaken industry

USO’s rush to offload its short-term futures contracts is a knee-jerk reaction to the sudden negative drop of oil prices last week. While the market has since recovered, the future of oil prices remains in doubt.

According to a report from Marketwatch, senior analyst Phil Flynn of The Price Futures Group said that,

“While the stock market continues to show optimism about life after the coronavirus, in the energy industry there is just more doom and gloom…There is a backlog and a wall of crude that the market just can’t look beyond as global storage hubs fill up…Tankers filled with oil floating in the ocean with no place to go and producers cutting but not fast enough to overcome the most significant demand destruction event in the history of the globe…The carnage to oil production will be felt for decades, and yet in the short term, it is all about the current glut of supply.”

Stumbling prices of crude in the midst of supply cuts

USO started a trend of selling off short-term contracts, which other traders promptly followed. Because of this, all trades within the next quarter, starting from the June contract, is trading in a largely flat NYMEX.

This has adversely affected prices of crude, with June West Texas Intermediate (CLM20) losing 24.6 before stopping the slide at just US$12.78[AU$19.72] a barrel. Meanwhile, international benchmark Brent crude (BRNM20) losing 6.8% and settling at $19.99 in ICE Futures Europe.

Oil price fluctuation is the “new normal" for now

The Organization of Petroleum Exporting Countries (OPEC) reached a landmark deal to cut worldwide supply in order to address the pandemic-reduced demand for oil. And some of its members have even begun to cut production ahead of the agreed start date of May 1.

However, the fact remains that the market is currently oversupplied, and refineries are ramping up costs in trying to stockpile the surplus. Giovanni Staunovo of UBS says that “The oil market still remains strongly oversupplied…[and] more places are running out of storage, so we need to see production shut-ins.”

Image by Devon Chandler / Pixabay

Micky is a news site and does not provide trading, investing, or other financial advice. By using this website, you affirm that you have read and agree to abide by our Terms and Conditions.
Micky readers - you can get a 10% discount on trading fees on FTX and Binance when you sign up using the links above.