US Producer Calls for CFTC Probe into WTI: Update
(Adds confirmation from CR)
US producer Continental Resources (CR) wrote to the market watchdog US Commodity Futures Trading Commission April 21 asking it to investigate urgently the West Texas Intermediate crude oil futures contract for a combination of possible market manipulation, or failed systems or computer programming. It also lodged a formal complaint with Chicago Mercantile Exchange (CME). CR sent NGW a copy of both.
The previous day, the May contract had closed at a negative price for the first time ever, with nearly all the collapse occurring in the last half hour of trade. That also triggered a call from CR to change the settlement price calculation so it reflects all trades done during the day.
It said the "unprecedented, historical event of WTI crude oil trading at negative prices for the first time in history and the circumstances surrounding the trading shows the system failed, negatively impacting a significant part of the American economy."
The WTI prompt month May (20) contract price had settled at $18.27/barrel the previous trading day, April 17. But on April 20 it closed at -$37.63/b. "Notably the CME chose to announce on April 8, 2020 that it had been testing plans to support the possibility of negative options such that if any month, WTI oil futures settle at a price between $8.00 and $11.00 a barrel that it could switch to a different pricing model that would allow for negative pricing," said the letter.
At about 1050 local time April 20, 2020, the CME reiterated that WTI futures can trade negative, which sent the May contract plummeting to $4.00/b. Trading volume was low prior to the CME announcement but became more active after the announcement.
Before the CME’s announcement regarding negative settlements, the contract was trading positive; but at around 1308 local time it started its fall, and dropped about $25/b in a three-minute span between 13.24 and 13.27 local time.
The producer said that fact, combined with the CME’s unusual announcement only hours earlier, a change in the computer modelling at a time of high volatility to the Bachelier computer model and the $40/b drop in the last 22 minutes over half of which was in the final three minutes of trading "strongly raises the suspicion of market manipulation or a flawed new computer model. The sanctity and trust in the oil and all commodity futures markets are at issue as the system failed miserably and an immediate investigation is requested and, we submit, is required. In addition to a review of practices at the CME, we strongly urge the market to change to a daily weighted average price to reflect the trading value experienced throughout the trade month."