The West Texas Intermediate May oil futures contract, set to expire on Tuesday (April 21), is suffering a slow and painful end at the hands of short-sellers having hit levels unseen since the second quarter of 1986, and it could get worse still.

At 12:59pm EDT on Monday (April 20), the contract was down a whopping 74% or $13.48 to $4.74 per barrel on concerns over near-term crude oil demand as traders dumped positions at a canter in the expiring contract.

The crash follows the OPEC+ oil producers’ output cut deal of 9.7 million barrels per day (bpd), inked over the Easter break, that was always going to be too late to rescue May. And might be too little for June, given that it only accounts for a third of a possible demand decline of 30 million bpd triggered by the coronavirus or covid-19 pandemic lockdowns around the world.

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Control manifolds sit near an oil storage tank at the Enbridge Inc. Cushing Terminal in Cushing, … [+] Oklahoma, U.S. (Photo: Shane Bevel/Bloomberg)


By that argument, clear evidence of market bears being all over U.S. front-month contract(s) is hardly surprising. Dire demand coupled with lack of storage, including at the main U.S. hub of Cushing, Oklahoma, and ample oil barrels could only mean dire near-term prices.

As a consequence, the number of active oil producing facilities in the U.S. have fallen to their lowest levels since the 2015-16 oil market downturn, and the Baker Hughes
rig count points to 483 fewer rigs in operation stateside compared to same week in 2019, bringing the count down to 529 rigs with 73 being idled last week alone.

U.S. headline oil production, currently the highest in the world at around 12.75 million bpd, is set to decline by around 1.25 million bpd this year. However, much of the reduced activity will take a fair bit of time to percolate through and reflect in the price.

It is why WTI’s contango, i.e. oil contracts for future delivery being pricier than current ones, has widened to historic double-digit premiums in favor of contracts six months out. Even with the WTI June contract, the contango is now around $12 per barrel as the benchmark traded down 11.7% or $2.93 in U.S. morning trading at $22.11 per barrel but remained substantially above the May contract.

Underpinning June WTI prices are moves by investors in exchange-traded funds (ETFs). These are investment funds traded on stock exchanges in the U.S. and elsewhere akin to stocks, and hold oil via arbitrage mechanisms designed to keep them trading close to their net asset values.

But what the WTI contango six months out tells us is that there are hardly any takers for U.S. oil for now, and supports the belief that the physical situation of May which appears to be pretty bad might spill over into June.

But unperturbed, ETF investors continue to pile on despite the fact around 58% of all U.S. oil ETF holdings are positions in June WTI. Now, if June WTI rolls down to end-May WTI levels, i.e. lower teens over the next fortnight, as is appearing likely, investors in ETFs tracking front-month WTI long would lose substantial sums of money, possibly by as much as half of their original position.

That too assumes WTI June will hold at ~$15 per barrel and factor in a negative roll yield for one month on front-month WTI of around 50%. Yet, there are no clear answers why the current trends are being registered for ETFs with around 565 million barrels in June front-month contracts in the hands of retail investors.

I am all for the long-term perspective 12 to 24-months out and fully expect a firming up of oil prices around $40 per barrel for the first quarter of 2021. But to take a long position in an ETF at a time when inventories and pipelines appearing to be filling and negative near-term oil prices remain a distinct possibility appears to be either pretty brave or downright silly speculation.

That makes the current oil ETF buying binge all the more troubling. While the vehicle of the proxy play in the shape of an ETF is akin to a listed equity, the asset class underpinning it – i.e. WTI oil – is a very different animal. For some retail investors that realization might come too late.

Updated with price revisions at 12:59pm EDT on April 20, 2020.

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