WTI contango going forward

H

hrokling

USO changed its profile to further out in the curve, and I interpret the messages from Asian products that they are either pulling out or doing the same thing. This should reduce some of the rollover effects WTI has seen for fifteen years.

Question is: How will this affect the contango going forward? Although yesterday's Cushing storage numbers came in somewhat lower than expected there is still plenty of oil. Going negative may have been that one-off anomaly, but what are your thoughts on how the curve will behave for the next contract expirations into summer?
 
I think the June contract will be under continuous pressure with the unwinding of the current supply glut. Once that contract expires, I think December 2020 30/40 call spreads are a very compelling buy.
 
Personally, I think the spread will narrow and @hrokling may be right and the negative price was one-off anomaly, however it seems like the exchanges and the FCMs are either smelling another very volatile delivery period or simply are freaked out...
July-June chart below
CQG_Integrated_Client_Chart_CLEN20-CLEM20_Daily.png


More on the "crude story" here.
 
Doesn't look like the WTI Jun20 front month futures will trade negative like May20 did. USO is getting completely out of front month positions/holdings for good, and all brokerage and clearhing houses are taking drastic measures to make sure their clients/customers do not have any chance of taking physical delivery. So all speculative longs for Jun 20 will probably be out and rolled into Jul20 at least a week before it expires.
 
VolSkewTrader said:
Doesn't look like the WTI Jun20 front month futures will trade negative like May20 did. USO is getting completely out of front month positions/holdings for good, and all brokerage and clearhing houses are taking drastic measures to make sure their clients/customers do not have any chance of taking physical delivery. So all speculative longs for Jun 20 will probably be out and rolled into Jul20 at least a week before it expires.
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Is CL one of the primary products you trade? I haven't traded commodity options much at all, but it has still been surprising to see the vol surface get so steep. Can these vol figures >150% of ATM in the 10-20d put strikes really be justified by the distribution of realized vol in times like these or are they starting to pack on pure risk premium?
 
VolSkewTrader said:
So all speculative longs for Jun 20 will probably be out and rolled into Jul20 at least a week before it expires.
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So, I wonder then who's left in Jun 20 after everyone has rolled into Jul 20. Volume might drop off sooner than before.
 
Magic said:
Is CL one of the primary products you trade? I haven't traded commodity options much at all, but it has still been surprising to see the vol surface get so steep. Can these vol figures >150% of ATM in the 10-20d put strikes really be justified by the distribution of realized vol in times like these or are they starting to pack on pure risk premium?
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The IVs have been completely justified, given CL's ranges and velocity of the moves. The IV has actually been trading at a discount to realized/historical vol, so it has remained bid despite trading, by far, at all-time high levels. The futures trading negative has completely changed the way the puts trade. The zero strike in the front month has significant downside risk, and has a much bigger delta (.01 vs 5 delta) with a normal price distribution model (which is the correct model to use now) vs the lognormal price distribution.

With theoretically unlimited downside now, the 10 - 20d put strikes actually trade at a much lower IV and skew slope than if modeled with zero as CL's absolute lowest price... which makes sense. You can no longer price a 30 day VIX equivalent value for WTI CL with negative strikes. I'm guessing this is how OTC F/X and options on spreads (calendars, WTI-Brent spread, etc) trade.
 
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hrokling said:
So, I wonder then who's left in Jun 20 after everyone has rolled into Jul 20. Volume might drop off sooner than before.
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Yeah. I think Jun20 volume will be thin going into the final week of expiration. They should start using the second month (currently Jul20) as the widely quoted contract for WTI when there is only a week left for Jun20 and/or as soon as when the 2nd month volume equals or exceeds the front-month.
 
VolSkewTrader said:
The IVs have been completely justified, given CL's ranges and velocity of the moves. The IV has actually been trading at a discount to realized/historical vol, so it has remained bid despite trading, by far, at all-time high levels. The futures trading negative has completely changed the way the puts trade. The zero strike in the front month has significant downside risk, and has a much bigger delta (.01 vs 5 delta) with a normal price distribution model (which is the correct model to use now) vs the lognormal price distribution.

With theoretically unlimited downside now, the 10 - 20d put strikes actually trade at a much lower IV and skew slope than if modeled with zero as CL's absolute lowest price... which makes sense. You can no longer price a 30 day VIX equivalent value for WTI CL with negative strikes. I'm guessing this is how OTC F/X and options on spreads (calendars, WTI-Brent spread, etc) trade.
More...

Thanks, that makes a lot of sense. I do notice that when vol blows up, long premium seems to carry for a while. The IV doesn’t get high enough fast enough. Seems a little suspicious to blindly buy into vol spikes but I have seen several opportunities arrive and persist for weeks while being too hesitant to be on the long side.

Good to know the very steep skews relative to ATM can still be a buy as well. I’m used to steep skew usually having negative carry unless timing is very good on the buy. And carrying easier on the risk side once they’re flatter.
 
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