By Barani Krishnan
Investing.com - The trust deficit in the front-month contract of U.S. crude is growing, even as the market struggles to maintain its rebound.
Oil prices remained higher for a fourth-straight day on Friday, while remaining down on the week after Monday’s historic negative pricing.
But open interest in the front-month June contract of West Texas Intermediate was already trailing that of July WTI, signaling investors’ preference for the “safer” contract that pledges to deliver oil later rather than sooner in a glutted market. It also signals that the spot contract could be in for another financial squeeze and another round of subzero prices when it comes up for expiry on May 19.
June WTI was up 44 cents, or nearly 3%, at $16.94 per barrel. For the week, it was down 7%
Brent, the London-traded global benchmark for crude, rose 46 cents, or 2%, to $20.21 by 3:20 PM ET (19:20 GMT). It was down 22% on the week.
Since plumbing $37 below zero on Monday, WTI has managed to stay on an upward trajectory amid optimism that U.S. production was falling — oil rigs in the country declined by 60 this week — and OPEC cuts of nearly 10 million barrels per day would kick in by May to partially offset the demand loss of some 30 million bpd from the Covid-19 pandemic.
Yet worries about another squeeze in WTI’s front month at next month’s expiry kept some at bay.
“More brokers, and not just the discount brokers, are limiting access to the first contract of oil futures,” Olivier Jakob, founder of Zug, Switzerland-based oil-risk consultancy PetroMatrix, said, referring to June WTI, which was at a discount of $5 per barrel and 25,000 lots less in open interest to July WTI.
“If open interest continues to move early out of the first month, it could be increasingly difficult for the roll of indices still having holdings of front-month futures, but as well for the delta-hedging of options,” Jakob added. “Margin requirements are also increasing to take into account the volatility seen this week.”
Igor Windisch of the IBW Oil Brief said brokerages that had told clients not to buy front-month oil included AMP Global Clearing, TradeStation Securities, INTL FCStone and Marex.
“All have imposed restrictions on their customers from taking new positions in June WTI and Brent. Margin requirements have been raised.”
Bob Yawger, director of the futures division for Mizuho, weighed in as well, saying that "(w)hen you think about some of these firms, their customers were probably not trading for size. But when you take on an aggregate amount of these folks, it adds up and you definitely lose some liquidity in the front."