Oil prices erased a steep drop to close higher Monday, extending a recent stretch of volatile trading with investors retreating from near-dated futures contracts.
U.S. crude futures for delivery in June closed up 3.1% at $20.39 a barrel, after falling as much as 8.7% earlier in the session. The price gauge started the year above $60 and has collapsed with the coronavirus sapping demand for fuel around the world. Prices have been extremely volatile lately after a futures contract fell below $0 a barrel on April 20, a first in oil-market history.
When such contracts expire, the holders must either sell them or take delivery of actual barrels of oil the following month in Cushing, Okla. The May futures contracts that turned negative on April 20 were set to expire the following day, and the holders likely couldn’t find available storage, forcing them to sell and driving prices into negative territory.
Following the turmoil and recent volatility, a number of exchange-traded funds and commodity indexes are changing their structure to hold futures for delivery well in the future. Samsung Asset Management (Hong Kong) Ltd. became the latest firm to make such an adjustment, changing its Samsung S&P GSCI Crude Oil ER Futures ETF to hold more contracts well into the future and selling September futures.
An oil pump jack near Williston, N.D.
Photo: andrew cullen/ReutersWith traders no longer wanting to hold oil for delivery soon, there are now more July futures contracts outstanding than June futures, a shift that normally would only occur closer to May 20, the day the June contracts expire. Investors say a lack of trading activity in near-dated contracts could make prices even more prone to outsize swings. On Monday, the July futures added 2.2% to $22.78 a barrel.
Despite the possibility of more volatility ahead, the recent changes to oil ETFs are necessary because they had become “a massive bull in the china store” and were exerting outsize influence on prices, said Ole Hansen, head of commodity strategy at Saxo Bank.
The Samsung ETF that is the latest to shift holdings trades in Hong Kong and manages about HK$3.97 billion ($512 million) in assets. It will sell about two-thirds of the U.S. crude futures it currently owns, which are due to deliver oil in September, according to an exchange filing. It will buy futures for delivery in October and December to replace them. The move marks the second time in recent weeks that the fund has shifted holdings to longer-dated contracts.
The aim is to avoid getting caught holding hundreds of millions of dollars’ worth of a single futures contract as it approaches expiration. If the price of that contract fell below zero, the fund would be worthless. The Samsung fund said its clearing broker, which it didn’t name, instructed it to buy put options that act as a form of insurance against negative prices.
In another sign of the shifts in oil investing, U.S. Oil Fund LP, the biggest oil ETF, now holds about 10% of its assets in crude futures for delivery and settlement in June next year. The fund had roiled oil markets earlier in the year by owning a large chunk of near-dated futures and selling them each month before the contracts expired, stoking price swings.
Some bets on an oil recovery are starting to pay off with more states in the U.S. lifting lockdown measures, supporting fuel consumption. The June U.S. crude futures have surged since hitting a low of $11.57 on April 21.
On Monday, Brent crude futures for settlement in July, the benchmark in international oil markets, added 2.9% to $27.20 a barrel.
Many analysts are bracing for more swings ahead. Prices had fallen earlier in the day after the Trump administration over the weekend stepped up assertions that the coronavirus originated at a laboratory in Wuhan, potentially adding to U.S.-China tensions.
The clash over how the pandemic started could spill into trade restrictions between the world’s two largest economies, analysts said, hurting economic growth and demand for raw materials.
“This could turn pretty ugly,” Mr. Hansen said.
Write to Joe Wallace at Joe.Wallace@wsj.com and Amrith Ramkumar at amrith.ramkumar@wsj.com
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