Why WTI Crude Is Crashing So Much Today

Summary

● Today, crude is crashing hard.

● Or more precisely, front month WTIC crude is crashing. Brent and other maturities aren't falling anywhere to the same extent.

● This article gives a very simple explanation for this extreme discrepancy.

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Brother, can you hold a few of these for me?

This will be a short and simple article. Yet it might be helpful in understanding some of the crude market's dynamics.

As I write this, May (front-month) WTIC (Western Texas Intermediate Crude) crude oil futures are crashing 37% to $11.50/barrel. At the same time, Brent Crude futures are dropping hard, yes, but still hover around $26/barrel. This is a massive differential. Indeed, that isn't the only massive differential we can see today. Even though WTIC crude for June (the next futures expiration) is also falling a lot, it still trades for $22.35, a 94% premium for just 1-month's time.

How can this be possible? How can this even be happening? There is actually a very simple explanation.

The Simple Explanation

First, we need to consider what's actually being traded here. On one side, the crashing contract is traded on NYMEX under the ticker CL. Now consider the following regarding this contract:

● This contract stops trading on the 21^st of April (tomorrow).

● This contract is settled physically.

This second item is critical. It means whoever is long the contract when it stops trading will have to take delivery of physical crude. This excludes any speculators not having somehow contracted for storage for this incoming crude. In practice, this excludes all people not professionally trading this thing at the same time as they contract physical infrastructure, including the very large ETFs which now dominate this market.

Now consider what the Brent contract traded on ICE actually represents:

● The front-month is the June contract. It stops trading on April 30, so very comparable to the WTIC May 2020 contract.

● This contract is settled in cash.

What that second item means is that any speculator can take this contract through the end of trading and subsequent expiration. Nobody is going to find barrels of oil with nowhere to store, if he does that.

Hence, for the WTIC front-month contract, you have extreme forced selling pressure from all the traders holding the contract which can’t possibly go beyond tomorrow holding it. For the Brent contract, you have no such pressure. You also don't have such a thing for the June WTIC contract yet, simply because it doesn't stop trading for another month.

The end result is what you see.

On the buying side of the WTIC May contract, and except for those who were short the contract and can't possibly deliver crude either, you have only those who can take oil into storage. That's actually a potentially very profitable trade – to just buy this discounted oil, store it for one month, and then deliver it to the June CL buyers. However, there is a very limited public who can take advantage of this.

Conclusion

The extreme selling you're seeing in the front-month crude contract today, which will make the news everywhere today, is driven by this simple mechanism. There is extreme forced selling in this front-month contract because any speculators that can't take physical delivery have to sell these contracts today, no matter what.

This isn't happening in Brent simply because Brent crude contracts settle in cash. Thus, any speculator can take them to their expiry without being forced to sell at any price, a "luxury" not available in WTIC crude futures.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.