A total mess on Oil market with CFD’s, Futures, rollover’s and some more…

If you are an amateur retail trader you’ve probably don’t know what in the hell is  happening with Oil prices recently (I am not talking about the fall) and that’s not strange. We experienced traders are also confused, searching for the proper explanations. To be honest, I found a couple of good ones, but I can honestly say that I don’t understend them well enoughfor now, but exploring to find out everything. It’s a total mess to most of us.

The price which you’ve followed last week is probably 30% different in this week because of the rollover (new June contracts) and that rollover was the biggest one since I follow the Crude oil, with huge price difference as you can see in your platforms. In my platform (VantageFX) Crude Oil rollover price has been changed on Thursday/Friday, from $19.68 to $26.47 which totaly disrupt a posibility for proper techinical analysis. I mean, this is a totaly legit price change (rollover), but it changes everything so far.

Oil rollover

An earlier rollover at my broker and I think how they made a good decision if Oil continue with sharp fall

At first, here’s an explanation of such a huge Rollover from my broker;


Due to the current uncertainty about future demand resulting from COVID-19 as well as supply due to potential future intervention by OPEC+ (and potential resolution of their current conflict)  we are seeing back month contracts trade at much higher spreads than normal in the market.

As a result the overnight swap fees in cash products have become much higher particularly as they approached the rollover date of the front month expiring contract.

What is a cash product?

A cash product is an over-the-counter derivative product of the futures contract. USOUSD is such an example, which is a derivative of Oil futures product. Unlike Futures products, the Cash products trade continuously with no expiration date.

What is a swap fee and how is it calculated for the cash products?

When clients hold a cash product past end of the trading day, similar to currencies and metals, the product attracts swap fees. This is shown under the ‘Swap’ column on your trading account statement. The swap fee can be calculated as below:

Swap rate x Volume x Contract Size x Number of Nights

What does the swap fee consist of?

The swap fees for the cash products consist of the following two important components:

  • Overnight financing charges covering the borrowed money required to open your position, outside the initial margin you’ve paid, and
  • A fair value price adjustment, an adjustment made to the product’s pricing based on the fair market value of the underlying security.

Why do the CL-OIL (futures contract) and USOUSD (Cash product) have such a large price difference currently?

Due to the uncertainty about future demand for oil because of the slowdown of growth across the world resulting from COVID-19, we are seeing CL OIL future contracts trade at higher prices than the USOUSD cash price than ever before.

As a result, the overnight swap fees in cash products have become much higher as compared to past weeks.

What are the main factors for the significant difference in prices across the two products?

The main factors contributing to the vast differences are as below:

  • Between May and June WTI oil futures contracts, there is currently a price difference of approximately $6.30. When CL-OIL futures rolled over from May to June contracts on 17th of April, the price gapped up by the same magnitude.
  • USOUSD or the cash WTI oil product is priced differently. In order to minimize price disruption and remove the impact of large price differences between the contract months, the USOUSD’s price ‘spreads out’ the price difference over the course of the next 28 days, until the next futures contract expiration…

Please consider the implications carefully and trade cautiously during this volatile period.


Furder on. Based on the article from Justin Low forexlive.com, front month WTI crude oil extends fall to nearly 30%, closes in on $13.

The contango is now slowly approaching $10, which is unprecedented, ahead of the expiry/rollover of the front month (May) contract tomorrow.
The front month contract is now down by nearly 29%, closing in on $13 while the more actively traded June contract is down by nearly 9% just under $23.
I would keep the focus on the latter given the current situation, but I reckon what we are seeing here is going to set a precedent for how oil may trade ahead of the expiry/rollover in the coming months as long as the current situation/outlook persists.
There’s good argument for oil to gain on a valuation basis but that requires a long-term view beyond the depths of the coronavirus saga. For now, we are still in the eye of the storm.
Amid the “higher” price rollovers, it shows that the far month contracts will still follow how the front month trades (but possibly not as big a drop) – for now at least – so there’s that to consider when seeing which way the June contract will be moving.
Adam Button forexlive.com wrote on Friday; “There are some strange things going on in oil as ETF flows skew the market” and continued…
I’ve been warning about this.
The OPEC-driven interest in oil markets sparked a wave of speculation and now it’s becoming clear what’s happened.
Evidently, retail traders have ploughed money into USO, which is the plain short-term long-oil ETF. The problem, is that 27% of the open interest in the June oil contract is owned by USO.
(total open interest is currently 532,607 contracts)
For some perspective, there are usually around 120 million shares of USO outstanding. That’s risen to nearly 900 million.

forexlive.com

What happened — I think — is that retail traders saw front-month oil at $20 and futures a few months out at $35 and thought they could ride USO. But it doesn’t work like that, the roll is devastating.
USO has now realized it has a big problem. It announced overnight that it will move 20% of the open interest of the ETF to the July contract, starting today.
“As a result of these changes, USO may not be able to meet its investment objective,” according to the filing.
It seems to me that the trade here is to short USO or the June contract because around one third (when you add the other ETFs) of the market will need to sell in three weeks.
USO 2

forexlive.com

In any case, watch out for some panic in the crude oil market today as confusion reigns he concludes.

I can just add this at the end.
To me, it’s impossible to analyse technically oil at the moment, there is simply too many different prices at the moment caused by huge rollover price differemnce (May/June contract) and that’s what will keep me a way for a while. Bad luck I would say as the Crude Oil has bacome so atractive recently with high volatility and it is my favorite trading instrument beside gold. Well, that’s the market.
Be very careful traders, this looks preaty ugly, there is a lot of confusion in the Oil market and someone could take an advantage with unexpected moves! Stay alert!
……………..

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One comment

  • Thank you Mario. I didn’t understand 30% but at least I realize that I am not alone in that situation with my broker (I have to pay a huge swap). 😦

    Like

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