Crude Chaotic Again As Negative Price Fears Spark Dramatic Index/ETF Shifts

Since we showed the renewed crash in the oil complex overnight, crude prices have roller-coastered dramatically after a major index tracked by billions of dollars in funds bailed out of near-term contracts for fear prices may turn negative again.

June futures fell over 21% in New York before paring most of the decline, only to collapse back to the lows overnight... and drag the rest of the curve with it...

S&P Dow Jones said it will roll all of its West Texas Intermediate contracts for June into July on Tuesday, due to the risk that the nearer contract will go negative.

Additionally, as we noted previously, the United States Oil Fund LP is also selling all of its WTI June contracts, while several other ETFs have said they will exit near-term contracts and buy later ones.

“Some of this downward pressure particularly in the June contract is an increasing lack of liquidity,” said John Kilduff, a partner at hedge fund Again Capital LLC.

This is not coming only from the USO, but also due to brokerage firms, like Marex Spectron and TD Ameritrade, restricting client’s abilities to add new positions to certain crude contracts, according to Kilduff.

“It’s going to exacerbate the whole marrying of the June contract with the over supplied physical conditions and the lack of storage,” Kilduff said.

As a reminder, the ETF has changed its investment policy five times in the last two weeks, as shown in the following chart which depicted the ETF's holdings as of Friday's close:

Source: Bloomberg's Laura Cooper

It also warned investors its valuation may deviate significantly from the underlying oil price, in effect acknowledging that it’s momentarily less focused on the price of WTI crude.

"While it is USO’s expectation that at some point in the future it will be able to return to primarily investing in the Benchmark Futures Contract or other similar futures contracts of the same tenor based on light, sweet crude oil, there can be no guarantee of when, if ever, that will occur,” it said in the filing, adding that USO investors “should expect that there will be continued deviations between the performance of USO’s investments and the Benchmark Oil Futures Contract, and that USO may not be able to track the Benchmark Oil Futures Contract or meet its investment objective."

All of which suggests we have crossed the eye of the hurricane as Goldman expects the market to test global storage capacity in the next 3-4 weeks - unlike WTI which was merely a Cushing event - which will likely create substantial volatility with more spikes to the downside until supply finally equals demand, as with nowhere to store the oil, supply has no other option but to be shut-in down in-line with the expected demand losses.

Alternatively, we could see another "Monday massacre" with producers of oil willing to pay buyers to take physical possession right around the time all global capacity is full, unless of course US shale producers drastically cut output in the coming days, not weeks.

Meanwhile, retail investors keep getting crushed, and with USO hitting new all time lows every day, the number of Robin Hood longs is hitting new all time highs.