Oil prices could go negative again for reasons beyond just storage

It’s not all about storage.

Yes, the world is watching the available amount of oil storage to try to figure out when the ‘tank tops’ and there’s simply no more space to fill with unneeded crude. There are, however, two other happenings right now which are wonky but important and could send oil prices down in a hurry.

First, the Chicago Mercantile Exchange recently raised its margin requirements for forward oil contracts. The June contract now requires margin of $10,000. Given that each contract is 1,000 barrels of oil, simple math tells us that $10 per barrel is a key level to watch in trading. Should crude fall under the $10 mark, it could trigger margin calls. That could in turn force more selling to raise cash, which sends prices lower, and the vicious cycle continues.

Also, on Monday S&P Dow Jones Indices quietly announced that all of its commodity indices will roll out of the June oil contract and into July. The “unscheduled roll” is happening because S&P Dow Jones Indices sees “the potential for the June 2020 WTI Crude Oil contract to price at or below zero” as well as what it calls the “steady decline in open interest for the June 2020 contract.”

In doing this, S&P Dow Jones Indices joins the beleaguered United States Oil Fund ETF, which trades under the ticker ‘USO,’ in abandoning the June contract for (hopefully) better days ahead.

As the world learned last week, not only are negative oil futures prices possible, but they can happen in a hurry, as the cycle of selling feeds on itself, and desperate traders and holders of the paper contracts will pay others to remove them of their obligation to find a home for oil they have no interest in taking delivery of.
Source: CNBC