April 24, 2020 / 6:25 PM / a month ago

U.S. commodities watchdog begins review of Monday's wild oil gyrations

WASHINGTON, April 24 (Reuters) - The U.S. derivatives regulator has begun a review of Monday’s oil crash, in which crude futures plummeted roughly $40 per barrel in 30 minutes, to ensure the market functioned properly and rule out foul play, an official said.

“We need to understand why that pricing happened at that place, at that time,” Dan Berkovitz, a Democratic commissioner at the Commodity Futures Trading Commission (CFTC), told Reuters in an interview.

“In a situation like this one, we look at all possible explanations, but we will take a close look here because of the extreme price move.”

Crude has slumped over 70% this year on a price war between major producers Saudi Arabia and Russia and a demand slowdown caused by the coronavirus outbreak. By Monday, oil traders were awash with supply and struggling to find enough ships, railcars and pipelines to store fuel.

The situation was compounded as the West Texas Intermediate crude benchmark May contract headed into expiry the following day, meaning traders would have to take delivery of yet more oil. At one point, physical traders were paying $40 per barrel to anyone who would take the oil off their hands.

That pushed the contract below $0 for the first time in history, settling at negative $37.63.

CFTC chair Heath Tarbert and CME Group Inc, home to the benchmark, said this week that the volatility appeared to be due to these fundamental supply and demand issues, rather than a financial markets issue.

Nevertheless, the gyrations have sparked worries of potential foul play or system failures, with billionaire oilman and President Donald Trump ally Harold Hamm asking the CFTC on Tuesday to launch a formal probe.

Traders have also criticized CME for allowing prices to go negative so quickly, since the oil still has tangible value.

“We will examine the root cause of this move, including whether there have been any violations of the Commodity Exchange Act that could have contributed to (it),” Berkovitz said.”

A CFTC spokesman has said it is closely monitoring market developments. CFTC has invested heavily in data analytic capabilities over the past decade.

In addition to combing the trading data for irregularities, the agency will assess whether the contract is working as a tool to determine fair and accurate oil prices, and any other factors that may have exacerbated volatility, the spokesman said.

Probes into dramatic market moves can take years.

It took five years for the U.S. to charge a UK trader for precipitating the May 2010 “flash crash” that briefly wiped nearly $1 trillion off the market, after initially saying no one individual was responsible. (Reporting by Chris Prentice Additional reporting by Devika Krishna Kumar in New York; editing by Michell Price and John Stonestreet)

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