Oil Falls After Major Index Bails Out of June WTI Contract

(Bloomberg) -- Oil fell following wild price swings set off when a major index tracked by billions of dollars in funds said it would exit near-term contracts for fear prices may turn negative again.

West Texas Intermediate for June delivery declined 3.4% Tuesday after both the outright price of futures and the spread between the June and July contracts were rocked by volatility. An abrupt decision by S&P Global Inc. to tell clients to sell their stakes in the June contract caused prices to plunge to near $10 a barrel in intraday trading. Crude inventories are filling quickly, forcing investors to confront the possibility that space won’t be available for physical barrels before the June contract expires.

“The June contract is going to be like what happened with May,” said Tariq Zahir commodity fund manager at New York-based Tyche Capital Advisors LLC. “It could go to twenty dollars, it could go to four dollars, it could go negative. You’re in unprecedented times. June could be all over the place.”

The discount on crude for June delivery relative to July, a structure known as contango, widened to as much as $7.69 a barrel before recovering to $5.26.

“You always see contangos when storage starts filling up,” Zahir said. “The spread getting out to these levels is being exaggerated with these funds. Just them selling the June contract and buying the July contract, that alone is going to widen the spread.”

An American Petroleum Institute report showed that U.S. crude stockpiles rose 9.98 million barrels last week, according to people familiar. Supplies in Cushing, Oklahoma, rose 2.49 million barrels while gasoline inventories fell 1.11 million.

Oil’s 80% plunge since the start of the year has come as the coronavirus outbreak destroys demand for fuels globally. In response, the world’s biggest producers have pledged to slash daily output starting next month to balance the market, but the collapse in consumption has led to a swelling glut that’s testing storage limits worldwide.

S&P is behind the GSCI commodity index, a popular investment product tracked by pension funds and other global investors. When S&P changes the investment policy, the banks who sell the product in turn move their holdings, triggering volatile energy markets.

“This unscheduled roll is being implemented based on the potential for the June 2020 WTI Crude Oil contract to price at or below zero,” S&P said in a notice seen by Bloomberg News. A spokesperson confirmed the notice.

Exchanged traded products -- most notably the United States Oil Fund LP -- have also rolled positions from June futures into later contracts, while the Bloomberg Commodity Index said it will roll from July into September.

Since WTI traded negative last week, more than 40% of the June contract has been liquidated. Holdings of the July contract have been stable, while those on September futures have jumped by almost 20%.

While the market is being hit by financial flows, Russia warned that there will be no quick fix to low prices. The nation’s energy minister, Alexander Novak said Tuesday that the oil market may only start to rebalance in the second half. Prior to the output cuts, which begin on May 1, supply from the Organization of Petroleum Exporting Countries climbed to over 31 million barrels a day, according to Geneva-based tanker tacker Petro-Logistics.

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