The pandemic is not over yet, but its potential to
turn things that we usually take for granted, upside down, continues unabated,
as it did during its early stages.
The fall of WTI crude price below zero for the first
time in history is a case in point. It happened on April 20 and the entire
global financial system got a seismic shock in the aftermath, despite a
reasonable recovery that followed next day.
“Was it a sort of foul play?” echoed the corridors
of power across the world. The urgency to find answers prompted CFTC, Commodity
Futures Trading Commission, to launch an investigation into it.
The commission has finally come up with what they call
an interim report. There is, however, no indication of a follow-up that usually
happens after preliminary or interim report.
The report has classified the factors that the
commission think contributed the unprecedented slump that pushed WTI crude
price into the negative territory for the first time ever, under two categories
– fundamental factors and technical factors.
The fundamental factors in the report are as follows:
- The excess supply of oil in the global market
- Worries about the lack of oil storage
- Unprecedented loss of demand
1. These fundamental factors were known to the investors – and the rest of us as well, of course - at the time of the great crash on April 20.
The question is as to why a report was warranted on
the issue, if that was the case.
It is the manner of the fall and the subsequent recovery
within a period of 24 hours that raised the eyebrows – and then demanded a
probe.
In short, it was a Humpty-Dumpty fall in magnitude,
but unlike the fate of the children’s favourite, king’s men and horses did manage to get it back on track – that surprised both investors and analysts in equal
measure.
The technical factors, according to CFTC, are
relatively complex. For instance, it identifies the much higher-than-usual open
interest in WTI near the expiry date for the May contract and a decline in the
liquidity of this contract as a contributing factor.
Even the exchange-based control mechanism could not
keep the fall below zero at bay, despite being triggered off as expected.
Since the likelihood of finding anything new, other
than what we know at present, is highly unlikely, the great oil crash will just
add yet another statistic to the unsolved trading mysteries of all time.
It, however, will provide the academics with an interesting
development to ‘dissect’ and analyse from every conceivable angle for a
possible clue – no matter how difficult or even futile the task would be.
The report has not identified an individual or a
group on the same wavelength, who could be held to account for the mishap.
Since the CFTC has clearly defined the periphery of
its scope in the report, it’s highly unlikely it will probe into trading
activities during the period to the core.
The critics argue that report does not shed light on
anything that we already did not know, taking a mild swipe at those who
compiled it.
The report can be downloaded from here:
