(Repeats column published on May 13. John Kemp is a Reuters market analyst. The views expressed are his own.)
* Chartbook: tmsnrt.rs/35Ta7OP
By John Kemp
LONDON, May 13 (Reuters) - Futures traders are avoiding the June and even July light sweet crude (WTI) futures contracts to avoid the extreme volatility that marked the run up to expiry of the May contract last month.
At the close of business on Tuesday, with five more trading sessions before the June contract is due to expire, traders held contracts equivalent to just 155 million barrels for delivery.
With five more sessions to go last month, traders still had 232 million barrels for delivery in May, according to an analysis of exchange records.
Positions in the June contract have been well below the five-year average since it replaced May as the front-month contract three weeks ago. (tmsnrt.rs/35Ta7OP)
Futures positions have been progressively shifted forward away from the June and even July contracts towards August and especially September, where they are safely away from delivery.
The unusually large number of positions left open in the last few days before the May contract’s expiry contributed to unprecedented volatility.
It remains unclear why so many futures contracts were taken so close to expiry, when buyers and sellers risked being forced to take or make delivery of physical crude in the storage tanks at Cushing in Oklahoma.
Traders, brokers and exchange surveillance officials are normally careful to ensure positions are kept well away from expiry unless the owner intends to make or take delivery and has demonstrated the means to do so.
For some reason, that did not happen last month.
At the start of the penultimate trading day of the May contract, traders still had 109 million barrels due for delivery, 17 million more than the previous five-year maximum and 41 million more than average.
In the course of the day, amid wild price gyrations, and negative prices at one point, 96 million contracts had to be closed out, more than double the usual number.
After a frenetic day’s trading, just 13 million barrels were still due for delivery, the lowest number for over five years.
Something went badly awry with May futures, which contributed to the anomalous behaviour of the contract compared with other contract months and with Brent.
Whatever the reason, traders are anxious to avoid a repeat.
Within three days of June taking over from May as the front-month contract, traders had moved the bulk of positions into July, with July replacing June as the most popular contract much earlier in the cycle than usual.
Now traders are abandoning July futures for August and September before July has even had a chance to become the front month contract.
With 62 million barrels already in storage at Cushing, and room for less than another 16 million barrels, traders remain nervous about being required to make or take physical delivery.
Crude inflows into Cushing have gradually slowed over the last five weeks, and even reversed last week, but with the remaining space all booked or leased, traders will continue to avoid WTI futures contracts with approaching expiry dates and delivery obligations.
- Oil futures markets need more transparency (Reuters, May 1)
- Oil fund’s forced sales send WTI prices plunging again (Reuters, April 30)
- Extreme volatility raises questions over WTI (Reuters, April 24)
- Price plunge casts doubt over future of U.S. crude futures (Reuters, April 21) (Editing by David Clarke)