Oil and Gas

CME Group, as oil contract plunges negative, says markets working fine

CHICAGO, April 20 (Reuters) - CME Group Inc said its markets are working properly after crude oil futures sank into negative territory for the first time ever on Monday.

The coronavirus pandemic has destroyed around a third of global fuel demand since early March and left producers worldwide struggling to store the resulting massive glut of oil.

U.S. crude plunged $55.90, or 306%, to settle for the first time ever below zero. The contract settled at a discount of $37.63 a barrel after touching an all-time low of -$40.32 a barrel.

U.S. crude reflected global oversupply, high levels in U.S. storage, and convergence of futures and cash prices ahead of the May West Texas Intermediate (WTI) oil contract’s expiration on Tuesday, CME Group said.

“CME Group markets continue to function effectively as participants use our WTI futures contracts to transfer their risk during these uncertain times,” the company said.

CME shares fell 3.7%, outpacing a decline in the broader market.

When oil futures contracts expire, the holder has to take possession of 1,000 barrels of oil for every contract owned, delivered to the main U.S. storage hub in Cushing, Oklahoma. However, Cushing is filling up, leaving traders with the unappetizing option of taking oil they do not want, or getting out of those positions.

“In this kind of world, nobody wants to have too much raw material around,” said Dan Basse, president of consultancy AgResource Co.

That threat of having to take physical delivery is why the May contract plunged on Monday, said Jeff Carter, a venture capitalist and former Chicago Mercantile Exchange board member.

CME updated its systems to process negative prices earlier this month. In a notice dated April 8, it told clearing firms and clients that it had a plan in place “if major energy prices continue to fall toward zero in the coming months,” and if WTI crude oil, RBOB gasoline or heating oil futures fell between or below a certain range.

CME may want to extend the time between first notice day and when the oil futures expire during crisis situations like the coronavirus pandemic, Carter said. That would give speculators who do not want to take delivery more time to exit.

CME sent an email to members on Monday saying that 15 contracts, including the May 2020 crude oil contract, “have no low limit and may trade negative,” said Ted Seifried chief market strategist for Zaner Ag Hedge.

“There was a price to be paid to get out of a long contract,” he said. (Reporting by Tom Polansek in Chicago Additional reporting by Julie Ingwersen and Karl Plume in Chicago Editing by P.J. Huffstutter and Leslie Adler)