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Oil Trading During the Storage Crisis

April 24, 2020 15:00

oil crisis trading

Dear Traders,

Crises always provide outstanding opportunities and pose exceptionally high risks. The coronavirus pandemic is taking its toll on economies by disrupting industries that were not prepared for changes in consumer demand and supply chains.

An unprecedented supply glut in the oil markets sent the recently expired May 2020 WTI oil futures prices deep into negative territory (with a price of negative 35 USD price reached at CME), posing a direct risk of following the same path for futures contracts with later delivery dates and for all other instruments related to Oil, such us our WTI crude oil spot CFDs and Brent crude oil spot CFDs.

Here at Admiral Markets, we are taking all possible measures to assist our traders through this current market turbulence. On April 22nd we announced our measures to address explosive volatility of oil markets and to ensure orderly trading for as many of our clients as possible.

How extreme volatility impacts trading in our oil CFDs

We usually calculate the price for WTI crude oil spot CFDs using the front (near) month underlying futures price. Due to the disorderly market, and the extraordinary settlement of the underlying May 2020 futures contract, instead of using the June 2020 contract as the basis for calculating our WTI crude oil spot CFD prices, we have decided to use the December 2020 contract, which we deem is less sensitive to current imbalances in the oil markets.

As there's a longer period between the present day and the last trading day of the December 2020 contract (November 19th, 2020), after the sharp drop on the May futures expiration our WTI crude oil spot CFD prices will gradually converge to December 2020 contract prices at a more moderate pace than if we were basing our WTI spot CFD on a contract with an earlier expiry. The extent of the daily fluctuations in our spot price CFD products and December 2020 contracts will be similar on a percentage basis, rather than on a dollar-to-dollar basis.

Should the underlying December 2020 futures contract also become disorderly in the future, we may again seek to rebase our WTI crude oil spot CFDs to ensure orderly trading. We are also closely monitoring the developments in the Brent oil markets and should similar volatility break out in the near month futures contracts, we intend to change the reference base contract for our Brent crude oil spot CFDs to one with a later expiry date.

Your alternatives when trading oil CFDs with Admiral Markets

In addition to WTI crude oil spot CFDs and Brent crude oil spot CFDs, our flagship Trade.MT5 accounts offer a selection of CFDs on oil futures contracts:


WTI

Brent

Instrument name

CrudeOilUS_M0

CrudeOilUS_Z0

CrudeOilUK_N0

CrudeOilUK_Z0

Month

Jun 2020

Dec 2020

Jul 2020

Dec 2020

Last trading day

18/05/2020

19/11/2020

28/05/2020

27/10/2020

These futures-based CFDs are not subject to position holding costs (no Swaps apply).

Price fluctuations in the near month futures contracts are also more sensitive to the current market situation and are typically more volatile.

CrudeOilUK_M0 (June 2020 Brent oil contract) remains in the list of instruments, however, trades in the close-only mode. This means that only a reduction of previously open positions is allowed.

Why do other brokers or sources have such big price differences?

Simply, there is no reference exchange market for an oil spot price. In a normal market, the spot pricing by any broker will be similar. In abnormal, dysfunctional market conditions as we have now for WTI - it is different!

In more detail:

There is no central trading venue or rulebook to form a single global spot (cash) price for commodities, such as oil. Spot prices are derived from the underlying relevant commodity futures contract by removing the implied holding costs. There are several options to do that, but the most important factor for any of these options is which particular futures contracts are used as a reference. Therefore, providers of spot prices that rely on different spot price formation methodologies, and quote their spot prices based on different reference futures contracts, will eventually have different quotes for the same 'spot' products at the same time.

When we, following our liquidity provider, roll over our spot price from one month to the next, we aim to avoid price gaps so that, at the expiration, our spot price is equal to the expired month's price and we will then gradually move towards the price of the next reference futures contracts. (Traders can see similar pricing approaches via some other sources.)

Risks, circuit breakers and safeguards

We would like to reiterate that the risks of one-sided oil markets are still present, and the following measures and limits remain intact:

  1. There is a maximum exposure limit of 20,000 EUR, or equivalent in another currency, applied to all spot and futures CFDs on crude oil in one and the same trading account.
  2. If any crude oil CFDs prices fall below 5 USD, we will enable 'Close Only' mode and stop accepting new orders.
  3. If any crude oil CFDs prices fall to 0 USD, we will stop pricing these CFDs, and close all positions at the current market prices and cancel all pending orders.

Please be aware of other increased risks that continue to exist and are still highly relevant to trading in Oil contracts, among all other risk factors:

  • Sharp moves and significant gaps in market prices
  • Limited liquidity, which may result in significantly wider spreads, and an increased amount of order rejections and slippage
  • Significantly higher overnight fees ('Swaps')
  • High probability of relevant instruments going into the close-only mode

Please also frequently check the details of the affected instruments in the Contract Specifications section on our website because, in stressed market conditions, applicable Swap debits and credits as well as supported trade sizes and trading session times may be subject to significant changes without special notice to you.

We retain the right to introduce further changes to trading terms as may be deemed necessary to ensure better investor protection and orderly trading during highly volatile periods in commodity markets.

Trade responsibly,

Admiral Markets