Key Words: The oil ‘futures market worked to perfection,’ says head of world’s largest exchange of crude’s historic plunge to $0

Key Words

Terry Duffy, chairman and chief executive officer of the CME Group Inc.


Bloomberg

It might not have been pretty to some but the crude-oil market worked as it should have on Monday, according to Terrence Duffy, CEO of CME Group.


‘The futures market worked to perfection.’ 

Duffy explained, during a CNBC interview on Wednesday, that despite the historic descent for West Texas Intermediate crude for the now-defunct May contract
CL.1,
+14.15%

to settle at an unprecedented level at negative $37.623 two days ago, a broken market wasn’t to blame.

Nobody should have been “under the perception that it can’t go below zero,” said the head of the world’s largest exchange platform by market capitalization. The Chicago-based CME Group’s market value is about $64 billion compared with nearly $50 billion for the New York Stock Exchange owner Intercontinental Exchange Inc.
ICE,
+1.89%
.

Individual investors, sometimes referred to as oil tourists, piled into exchange traded products, including United States Oil Fund LP
USO,
-10.67%

in recent weeks, but were slammed on Monday as crude futures collapsed to levels never before witnessed, amid a glut of oil and few places to store the asset.

Check out: Retail investors are getting ‘hosed’ with the biggest oil ETF down more than 30% this week

The stunning subzero drop for oil prompted Continental Resources Inc.
CLR,
+12.61%

founder Harold Hamm to file a complaint with the CME and write a letter to the Commodity Futures Trading Commission asking for a probe into “potential market manipulation, failed systems or computer programming failures,” Reuters reported.

A CFTC spokesman told Reuters: “We continue to look at these developments closely.”

Hamm on a separate segment Wednesday on CNBC said that “our industry is beleaguered,” referring to the energy sector’s price collapse, which had been playing out before Monday, as the COVID-19 pandemic amplified fears that too much oil is being produced into a global economy that has been mostly seized up by closures to help limit the spread of the deadly contagion.

Hamm said that only investors who are willing to take physical delivery of oil after contracts expire should be purchasing oil futures, which carry the risk of infinite losses for investors because the contracts usually are bought using leverage.

“Anybody that can’t take physical deliver should not be buying those futures,” he told the business network.

For Duffy’s part, he said there was “no secret” that a decline below $0 was a genuine possibility.

The CME boss said that a lack of follow through on oil purchase promises made recently by the U.S. government also left the market with no big buyer to step in during the rollover period for May contract, when investors sold futures for delivery in May and upped their exposure to June contracts and those for other months.

The Trump Administration pledged to buy large quantities of oil and “fill up” the U.S. Strategic Petroleum Reserves to its full 713.5 million barrels capacity, during a on March 13 press conference declaring a national emergency due to the spread of COVID-19.

At the time, futures contracts for the U.S. benchmark West Texas Intermediate crude settled at $31.73 a barrel. Congressional Democrats then blocked a $3 billion proposal, seen as a bail out of Big Oil, to fill up the reserve as part last month’s coronavirus stimulus package. Yet on Monday, Trump said the U.S. was “looking” to add as many as 75 million barrels of oil to the reserve, after an historic day for markets that saw crude prices turn negative.

Meanwhile, June West Texas Intermediate crude
CLM20,
+14.15%

rose $2.21, or 19.1%, to settle at $13.78 a barrel on the New York Mercantile Exchange on Wednesday. A stabilization in prices of crude were attributed with helping to give a lift to equity markets, along with some upbeat earnings.

The Dow Jones Industrial Average
DJIA,
+1.98%

2% to finish at 23,475.82, the S&P 500
SPX,
+2.29%

gained 2.3% to end at 2,799, while the Nasdaq Composite Index
COMP,
+2.80%

climbed 2.7% to close at 8,495.

CME’s share closed 0.8% on the day but is down nearly 11% in the year-to-date.

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