The Commodity Futures Trading Commission has warned that as the expiry date for the June West Texas Intermediate contract approaches, the chances of extra price volatility have increased.
The regulator told brokers, exchanges, and clearing houses that "they are expected to prepare for the possibility that certain contracts may continue to experience extreme market volatility, low liquidity and possibly negative pricing."
Last month, when the May WTI contract expired, a frantic selloff among traders triggered a price slump deep into negative territory, with the benchmark at one point reaching -$38 a barrel. The selloff itself was caused by traders rushing to get rid of their oil to avoid taking physical delivery in a context of constrained storage space.
Prices rebounded to positive territory soon enough, but the fear that what had happened once could happen again remained in extra-volatile markets. Since April 20, however, prices have been on the mend, with West Texas Intermediate trading at $25.55 a barrel, up by more than a percentage point from yesterday.
This latest improvement was triggered by an unexpected dip in U.S. crude oil inventories as reported by the Energy Information Administration, which followed the American Petroleum Institute’s estimate of a sizeable increase in inventories for the week to May 8.
There are some early signs that demand for oil may be on the mend, too, with gasoline production rising last week and inventories falling by 3.5 million barrels. Storage space for crude, however, remains constrained due to the sheer size of the overhang on a global scale. This means that a second selloff is a very real possibility and a temporary slide of WTI below zero is also possible.
The wider economic context is not particularly conducive to optimism, either. A growing number of analysts are warning of a slow and prolonged economic recovery, with the latest warning coming from Fed chairman Jerome Powell, who said an extended period of weak economic growth was to be expected.
By Irina Slav for Oilprice.com
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