You Have Been Misled (by MoneyMiser21)

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So these headlines…

“Oil hits $0!”

“Oil goes negative for first time ever!”

Yeah, they’re true… but they’re really not true.

This is a very misleading topic that people who do not trade oil have blown up for clickbait purposes.

I’ve traded the ETFs and oil futures for more than 14 years, and remain flabbergasted at how the so-called “reporting” of what took place this past Monday went down.


I guess I can break out my 13-year news producer hat and give you the real context behind the plunge and subsequent pop.

So here you go.

First, context on how oil trades:

  1. The true front month futures contract for trading purposes is not always the one with days closest to expiry (and this is what happened earlier this week).

For trading purposes, it is the one with the fewest days to expiry for FUTURES OPTIONS.

Why? Liquidity and hedging.

I.E. it will have the most volume traded, and have opportunity for large players (funds, etc.) to control their risk.

  1. Once the futures options expire for a particular monthly contract (at 2:30 p.m. EST at daily settlement time for the futures), there begins a process called rolling.

This is where traders who want to keep their current positions change them from the old contract to the new one.

I.E. roll forward (in this case from the May to the June contract) to the next month.

  1. The CME/NYMEX sets a hard end date for an oil futures contract 3 trading days before the 25th of each month.

In this case, the May oil contract (ticker symbol /clk20) had a hard end trading date of April 21st.

There is typically a few days between the expiration of the old contract and the next one. This is often used by physical buyers and sellers (i.e. they actually take delivery or send the oil) and large firms to settle positions in an orderly manner… instead of a large amount of contracts at once.

This time window is not generally used for trading purposes, and the day following the start of the roll sees the next month’s contract overtake the prior in volume significantly.

Also, with hours to go before the end of a contract, the CME/NYMEX prevents the opening of new positions by traders (with certain exceptions).

  1. Here the how this applies to earlier this week:

a. The May oil contract futures options expired at 2:30 p.m. EST on April 16th (Last Thursday).

b. The true front month contract for trading purposes rolled from May to June at 6pm EST on April 16th (Globex open for electronic trading).

c. The main oil ETF for stock traders is the ticker symbol USO (and it’s a piece of garbage that NO ONE should trade for multiple reasons, but this post is already really long).

It began rolling forward its contracts from May… to June and July approximately 2 weeks before the end of last week.

Under the terms it’s constructed”, it should have been out of the majority (if not all) of its May contract positions by the end of April 16th.

So we have the main ETF (i.e. what stock traders would use for a “pure” oil play), the options traders/hedgers, and the main futures traders all trading the JUNE contract as the front month to start Friday, April 17th.

d. These things combined to create a MASSIVE liquidity hole for the May contract specifically on Monday, April 20th. When there is a lack of liquidity, it does not take much volume to drive prices to extremes (one way or another).

I just so happened to have that day off from my job, and watched the headlines with bewilderment… especially when CNBC and Bloomberg started reporting $5 oil, then $0 oil. Both networks DO know better, and SHOULD HAVE put out the explanation.

But no… members of my former profession instead went for the clickbait and panic draw.

And this is one of the reasons why I left the news biz at the end of 2014.

Yes the May contract hit zero and went negative… but it was not the true front month contract for trading purposes. The June contract was (and is as of this post).

In fact, volume traded showed around 8-to-1 in favor of the June contract when I saw the zero price reports begin crossing on Monday… and ended Monday’s trade 158,195 (May) vs. 1,177,354 (June).

Pic MAYvsJUNE OilFuturesVolume

My grandfather, who ran Richmond news/talk radio station WRVA is probably still shouting from the great beyond at this blatant violation of journalistic ethics and poor reporting.

If this is the standard that so-called journalists hold themselves up to now… then the National Edward R. Murrow Award and Peabody Award I earned as part of an amazing team at WSLS in 2006 and 2007… are worth less than the material the awards are made from.

As of this writing at 5:56 p.m. EST on April 23, 2020… this lowest price the continuous WTI oil contract (ticker symbol /cl, the true front month contract prices only) has traded during the year 2020 is $6.50. I will include a screenshot from thinkorswim with this post (note the green dashed vertical lines indicate the end of futures options for that month’s oil contract).

So there you have it. The truth about “zero” and “negative” oil. It both did, but really DID NOT happen.

Call it a paradox, an enigma, a rip in the space time continuum that even three Starship Enterprises couldn’t fix.

I’ll call it what it really was: Another blatant episode of misreporting by people who are paid to know better, and inform those whose choose to dedicated their time to other professions and passions.

You deserve better.

We all deserve better.