CFTC report details events of April 20 WTI price swings, avoids conclusions

Washington — A Commodity Futures Trading Commission staff report slated to be released Nov. 23 compiles data on market activity and economic factors leading up to the negative settlement price in the NYMEX May WTI futures contract April 20, but stops short of analyzing propriety of trading or assessing whether market structures need to be adjusted by the derivatives regulator.

"This is really designed to outline a number of facts that we have, so we're not commingling debatable conclusions with bulletproof facts," Scott Mixon, the CFTC's acting division director for the CFTC's Office of Chief Economist, said in a briefing for reporters. In the run-up to the report, there has been debate over whether CFTC actions were needed in light of the trading activity.

At issue was trading April 20, when NYMEX May WTI settled at minus $37.63/b, after having fallen $55/b. The price collapse at the time was blamed on a lack of storage capacity at the Cushing, Oklahoma, delivery point, forcing traders to exit positions ahead of the May contract expiration.

Dorothy DeWitt, CFTC director of the Division of Market Oversight, said that key market fundamentals coinciding around the May contract trading and settlement included an oversupplied crude oil market, an unprecedented reduction in demand caused by COVID-19 and concerns about global availability of crude oil storage, as well as storage at the delivery point for the physically settled WTI contract in Cushing.

Pressure to exit positions

The CFTC staff report found that during the weeks prior to expiration, the May contract had "very large open interest relative to history," with about 630,000 contracts, compared to 400,000 or 500,000 at peak the prior year, Mixon said. In addition, the peak in open interest of the contract was close to the expiration, coming about 10 days prior, compared with about a month prior earlier in the year, he added.

"This meant that there were a lot of positions that needed to be closed out, or otherwise market participants had to stay in for delivery of the crude oil," Mixon said.

Mixon said staff was able to isolate activity of interest on April 20 to the period of 2 pm onward. Prices were trending downward on April 20 for most of the day, but the price decline accelerated around noon and then close to the end of the day around 2:08 pm when prices reached an inter-day low, before settling at negative $37.63/b, he said.

Upon examining the order book of bids and offers available to market participants during the period, CFTC staff also observed a decrease in liquidity in the May contract that started well before April 20.

And finally, looking at market integrity controls, the CFTC observed that over 30 of the dynamic circuit breakers were triggered in the May contract, mostly involving negative prices, Nixon said. Circuit breakers were also triggered in the NYMEX May/June spread contract.

Prior calls for investigation

Democrats on the commission have previously pressed the CFTC to look into how trading at settlement (TAS) transactions factored into the price swing and to complete its investigation prior its recent action on a final rule setting federal position limits.

CFTC Chairman Heath Tarbert said in July the staff analysis would likely point to a confluence of fundamental and technical reasons for the drop, including "a few market structure considerations that have not previously [been] highlighted."