Both bulls and bears can take heart from yesterday’s developments. The supply side of the equation favoured the former. There are growing hopes that the global oil tanks will not overflow. This is what Saudi Arabia wants to avoid by any means. The Kingdom’s energy ministry directed Aramco to reduce the country’s output by an additional 1 mbpd next month. If fully implemented, it will take the total cut from the OPEC leader to nearly 5 mbpd below the April level with production at 7.5 mbpd. This, together with other countries of the OPEC+ group enacting the supply restrictions helped limit the falls in outright prices yesterday. The structure of the two main crude oil futures contracts has strengthened despite the flat price weakness. Falling US rig count and production also played their parts in narrowing the WTI contango. If the forecast from Genscape of a drop of 350,000 bbls in Cushing stocks proves accurate further rally is expected in WTI spreads.

Producers are doing everything in their power to balance the oil market but their efforts were hindered yesterday by growing concerns about the coronavirus. Although more countries are easing restrictions the dreaded second wave of virus infections are darkening the mood on the demand side of the equation. In Germany infections are rising exponentially, in South Korea the number of confirmed cases jumped to a one-month high and in the original epicentre of the outbreak, in Wuhan the first cluster of infections was reported for the first time after the lockdown was lifted in the middle of April. The predicted and predictable demand growth is not set in stone: if the second wave of the coronavirus spreads globally again, stock markets will drag oil prices lower in the foreseeable future.

ICE products are in growing demand

The coronavirus pandemic is causing health as well as financial pain, sometimes unbearable, across the globe. Confirmed cases worldwide are rising every day, albeit at a slower pace. As of last night, they have reached 4,150,000. Although equity markets have regained a big portion of the lost ground and oil has started to stabilize, too there were only a handful of winners when risky assets went into freefall. Institutional as well as retail investors were badly burnt, and their confidence shaken. Their mood only got gloomier when the inexcusable crash of the May WTI contract to -$40/bbl took place on April 20. One of the few winners of the most serious crises of the century is, undoubtedly, futures exchanges.

The two biggest oil futures markets, the CME and ICE, are enjoying their best ever year so far as the average daily volumes (ADV) are at record highs. The growth rates this year are not marginal, they are remarkable. Historical statistics suggest that high volatility is usually coupled with increasing ADV. And volatility has been well over 100% for a significant amount of period this year. Take the CME WTI contract as an example. On average 1.614 billion bbls has changed hands daily in 2020 between January and April. This is 20 times as much as the global thirst for physical oil is forecast to be in the second quarter of the year. The growth rate compared to the previous highest reading in 2017 is 30%. Brent is matching this performance: this year’s ADV at 1.257 billion bbls is also 30% above the previous record of 2017. ICE Gasoil ADV have also increased by slightly more than 30% whilst CME products are lagging somewhat behind. Heating Oil volume has climbed about 23% from the previous record and RBOB a mere 11%.

The most striking development, however, is the explosion of trading volumes of the traditional CME product contracts on ICE and, to a certain extent, the surge in Brent volume on the US futures market. Starting with the latter CME Brent has averaged 153 million bbls a day in 2020, 51% higher than last year. This impressive performance pales in comparison with growth rates the RBOB and Heating Oil contracts have produced on ICE. RBOB has averaged 76 million bbls (or 3.2 billion gallons) in 2020. This is 2.7 times as much as the previous record last year. Heating Oil volume has jumped fourfold – from 42 million bbls per day in 2019 to 169 million bbl this year.

The market share between the two rivals is relatively stable on the crude contracts. CME WTI has around 85% of the WTI market (it has been between 82% and 85% in the past six years). ICE Brent has claimed anywhere between 87% and 92% of the total Brent market during the same period – this year it is 89%. ICE’s share of the RBOB and Heating Oil markets, on the other hand, has soared since 2017. It was 9% and 11% respectively 3 years ago compared to 26% and 43% this year. This change is most notable in the second month Heating Oil contract. Its ICE volume exceeds that of the CME on a frequent basis. It was 57 million bbls yesterday compared to 41 million bbls on the CME.

Speculative NSL keeps increasing

Money managers are growing in optimism. In fact, in WTI they have tried to pick the bottom since early March. Net speculative length (NSL) in the US marker reached its low point nine weeks ago at 118 million bbls when WTI was $47/bbl. WTI NSL has increased every single week ever since and reached 341 million bbls in the latest reporting period with WTI settling below $25/bbl. Those who were brave enough to start building length up at the beginning of March still have a long way to go to turn their positions into profit, especially considering that they had to roll their long positions over twice with additional losses due to the contango nature of the WTI futures market. The jump of 223 million bbls in net speculative long positions comprises an increase of 177 million bbls in gross length and a reduction of 46 million in speculative short positions.

Financial investors are more careful in Brent. Although its NSL has risen more than threefold, from 56 million bbls to 177 million bbls in the space of five weeks this rise was chiefly due to bears covering 91 million bbls of their short positions whilst bulls have added a meagre 30 million bbls to their length. Combined WTI and Brent NSL at 518 million bbls is the highest since the end of January. Yet, the amount of money under management in the two main crude oil futures contracts is just over a third of the end of January investment level – less than $14 billion versus $36 billion in January.