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April 22, 2020

With WTI Oil Futures Prices Negative, Something Is Fundamentally Wrong in The Oil Derivatives Markets–The CFTC Must Investigate Speculative Oil Trading Activities

Wednesday, April 22, 2020
Contact:  Pamela Russell at
Washington, D.C.  –  Dennis M. Kelleher, Chief Executive Officer of Better Markets, issued the following statement with respect to recent trading activities in the oil markets:
“Something is fundamentally wrong in the oil derivatives markets when—for the first time in history—an oil futures contract for WTI (West Texas Intermediate) falls more than $55/barrel and closes below $0, at -37.63 one full trading day before expiration.  That happened Monday for the May futures contract, causing havoc across multiple markets.  Yesterday, the oil markets again saw a precipitous drop in the price of oil, and this time it occurred across all near-term contract months, including a more than 50% drop in the June WTI contract from Monday’s close.  Meanwhile, cash-settled contracts, like Brent crude, remained well above the WTI physically settled contracts.
“In light of the ongoing pandemic-caused economic shutdown, it is easy to jump to the conclusion that these dramatic and unprecedented events are all due to supply and demand imbalances, as the Chairman of the CFTC appeared to do yesterday.  While the instinct to quickly provide comfort to the markets may be understandable, such an assertion is premature and without a valid, data-driven basis that only a thorough, rigorous and unbiased investigation can provide.  Given the incredibly high volume of speculative activities in the oil markets generally and in the futures markets in particular, the CFTC must promptly conduct such an investigation and release a full report to the public.
“There are numerous facts and circumstances about recent trading activities that demand such an investigation, including the apparent role of financial speculators like commodity index funds and exchange-traded funds (ETFs).  These speculative traders replicate oil prices through paper trading, do not have the ability to accept physical delivery of oil, and must roll all of their contracts before expiration out of the front month and into future-month contracts.  This well-known roll strategy has spawned an entire ecosystem of often frenzied speculative trading around the roll, which may have contributed to, if not caused, Monday’s unprecedented free fall into negative territory. 
“Better Markets has for years demonstrated that such excessive speculation in physical commodity markets, including oil, has the potential to undermine the integrity of the markets when firms involved in the physical markets—legitimate hedgers—comprise too small a proportion of the overall open interest in individual contracts.  In addition, we have pressed the CFTC for years to implement speculative position limits that would maintain orderly trading and prevent market panics that inevitably follow from the oversized market presence of speculators like commodity index funds and large ETFs
“Yet, just one ETF, USO, reportedly held at least 24% of the open interest in the June WTI contract as of the close of trading on Monday.  It reportedly increased that position on Tuesday, and along with one other huge ETF, traded almost 110,000 contracts or the equivalent of 19% of the previous day’s open interest in the contract.  That kind of speculative concentration destabilizes markets and must be investigated by the CFTC. 
“The CFTC must also investigate the potential that traders engaged in manipulative activities to push oil prices down, given the precipitous fall in price and the meaningful but relatively low volumes near Monday’s negative close.  One strategy previously used by some traders is to do that near the end of the trading day to benefit other contracts in which the price is fixed at settlement.  For example, the CFTC’s investigation should carefully review contracts executed using a pricing practice known as ‘trading-at-settlement’ (TAS).  The CFTC has previously brought enforcement actions for abuse of the TAS order type on oil contracts and should be concerned about the potential use of such strategies in stressed market conditions.
“A full CFTC investigation released to the public is critically important.  First, the markets, market participants and the public need confidence that these markets are not being manipulated by excess speculation or otherwise.  Second, these prices, and the volatility of these prices, are likely to have significant implications for the energy industry in America, including the impact on legitimate physical hedgers, oil and gas availability and capital allocation.  Third, consumers will pay the price for this volatility at the very point when they will be relying to an even greater degree on a functional oil market as the economy begins its recovery in the months ahead.  Fourth, a well-functioning energy market is also likely to affect U.S. relations with oil exporting countries around the world.”
“That’s why the CFTC must promptly assure the public that it will fully investigate these matters, that unlawful conduct, if any, will be swiftly prosecuted, and that it will finalize an effective position limits rule that in fact eliminates excessive speculation, including in the oil markets.” 

Better Markets is a non-profit, non-partisan, and independent organization founded in the wake of the 2008 financial crisis to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again. Better Markets works with allies – including many in finance – to promote pro-market, pro-business and pro-growth policies that help build a stronger, safer financial system that protects and promotes Americans’ jobs, savings, retirements and more. To learn more, visit  



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