Oil’s breathtaking rout rolled on Wednesday, as Brent traded down as much as 17% before paring losses.
In Hong Kong, the Samsung S&P GSCI Crude Oil ER Futures ETF plunged, in another manifestation of the same dynamic facing USO stateside. The market’s woes are rippling out, affecting oil-linked products globally. The Hong Kong-traded vehicle fell nearly 50% Wednesday on volume that was 15 times the daily average.
100% of the fund’s futures holdings are in the June 2020 contracts. “It is possible that the price of June 2020 contracts will drop to zero or a negative value”, the fund said, in an announcement, adding that in the worst case scenario, “the Net Asset Value of the Sub-Fund may drop to zero and investors may suffer a total loss of their investments in the Sub-Fund”.
Given that, the fund said continuing to hold the June contracts isn’t tenable. So, Samsung Asset Management will replace the entirety of its holdings of the June 2020 contract by buying September contracts. “In doing so, the Manager is taking a defensive position to protect the interest of the investors in order to avoid potential losses under exceptional circumstances”, the announcement says.
Obviously, the potential for tracking error will now be higher for that fund. And on and on. These products are, in essence, broken. Which makes sense, because so is the underlying market.
Satellites now say storage could run out globally, an unprecedented event called “tank tops” in industry circles. This could occur within a month, or at least by June.
“The satellite bounces radar signals off the massive metal tanks that store oil and that data is used to calculate how much crude is inside”, Bloomberg’s Javier Blas explains.
Even this data may paint an overly rosy picture, as some of the free space isn’t actually free – it’s rented already.
“The world of negative prices doesn’t have a floor, and after this week, anything is possible”, Blas goes on to write, in the same linked post, adding that “Plains All American Pipelines [this week] asked producers of Eastern Kansas Common to pay it $55.05 a barrel if they wanted to sell”.
One veteran industry analyst thinks negative $100 a barrel is possible.
“We are now working on the most oddball storage locations, really tough locations where there are operational constraints”, Krien van Beek, a broker at ODIN – RVB Tank Storage Solutions in Rotterdam, told Reuters. “The big tanks where you pull a ship in and empty the whole thing, that’s all gone. What you have is pots and pans”.
Meanwhile, Interactive Brokers took an $88 million hit after some customers “incurred losses in excess of the equity in their accounts” when prices went negative on Monday.
“IBLLC has fulfilled the firm’s required variation margin settlements with the respective clearinghouses on behalf of its customers”, IB said, in a press release.
“Why [did] the broker allow retail money so close to expiry?”, the above-mentioned Blas wondered, in a tweet. “I know it’s completely legal”, he added. “My question is whether the broker should take a more proactive role in making sure people know what they are doing”.
And I had spreads on both the July/Aug and Aug/Sep contracts, because the front month was already at 8$ and I thought THAT was high… fk me
Re IBKR $88 M oil related losses
The answer to Javier’s Q is that IB does not have much if any competent people at the front lines (direct communications) nor back office (margin). Their answer to everything is to hold up the account form that was filled out by the investor and say: lookie here- it says you a sophisticated and we have computer driven service. Further, note that margin calls are automated – no telephone calls will be made. They don’t pick up the phone and the vastly overworked people in their “customer service” have no idea what is going on. That same group has no idea what an error account is b/c management purposefully did not tell them of the existence of such an animal.
The end result is that events like this happen out of the blue, occur very quickly and on a regular basis. IB rope a dopes complaints to the SEC and CFTC who continue to want to go home every day at 5 PM, just waiting for an offer to work at a law firm that supposedly helps sort through all this crap. Welcome to what used to be a good firm, but now electronically and automatically screws its customers.
Anyone even remotely familiar with the oil business would have been in SCO for the past month.
Yesterday was a Very Good Day.
Especially if one doesn’t use leverage.