We are observing an extraordinary situation on the oil market since the beginning of this week. It relates primarily to WTI oil but due to intermarket connections it also affects Brent price. Turmoil on the oil market is depressing moods on the other financial markets as well. We have explained the situation in more detail yesterday.
An extraordinary rollover on WTI and Brent contracts took place last night. Active contract was changed from Jun20 to Jul20. The move is aimed at limiting risk of active contract price falling into negative territory (as it was the case for May20 contract). Price drop below $0 leads to a complete collapse in liquidity, which could result in inability to roll over position to the next-month contract. A lot of futures traders experienced such a situation, what ultimately led to price dropping to as low as -$40 per barrel.
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Create account Try a demo Download mobile app Download mobile appIt should be noted that CFD contracts offered by XTB aim to replicate the price performance of a nearest contract that does not require investors to roll over manually. Once price drops into negative territory, rolling over would be much harder if not impossible. Rollover itself does not affect the financial result of a transaction as swap points are added or subtracted depending on the position size and shape of the futures curve.
Ongoing situation is also tied to the fact that around 25% of open interest on the Jun20 contract is held by the US ETF, USO. Situation risks triggering abnormal prices swings once the fund decides to roll over to the next contract series. USO is to huge extent responsible for the ongoing turmoil in the oil market.
We are currently observing "super-contango" in the oil market. Source: Bloomberg
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