Oil Fall Prompts Call for U.S. to Probe Whether Market Defective

(Bloomberg) -- The U.S. must determine whether “structural issues” helped push trading of a benchmark crude futures contract into unprecedented negative territory last month, a member of the Commodity Futures Trading Commission said Thursday.

Price moves in the CME Group Inc.’s West Texas Intermediate May contracts showed an “extreme divergence” between the futures and the spot price for oil, according to Dan Berkovitz, a Democrat on the five-member CFTC. The regulator must work with the CME to determine whether the price moves were a one-time occurrence or a reflection of dynamics in the contract that could recur, Berkovitz said in a statement.

A rapid plunge in the final minutes of trading on April 20 that pushed prices to below zero thrust one of the world’s most-traded futures into the spotlight. CFTC Chairman Heath Tarbert has said the agency is “conducting a deep dive” to understand the move, but that the negative prices appeared to have been a result of supply and demand related to storage capacity and the global economic slowdown amid the coronavirus pandemic.

“The WTI contract is a key benchmark in the energy and financial markets,” Berkovitz said in his statement, which was prepared for a meeting of a CFTC advisory committee that he leads. “A futures contract that is disconnected from the physical market cannot serve as a means to discover prices or manage price risks arising from the use of the commodity.”

Berkovitz said he’s concerned that many of the same dynamics that drove the move in the May contract haven’t been resolved. The WTI June contract, the next futures to come due, expires on May 19.

“There is a high probability that the supply, demand and storage conditions that were present during trading in the May spot month will persist through the upcoming weeks and into the spot month for the June WTI futures contract,” Berkovitz said.

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