WTI oil futures nosedive in 2020 likely resulted from flood of US ETF investors, limited storage capacity, BIS study says

The unprecedented plunge of West Texas Intermediate crude-oil futures in April 2020 probably stemmed from both small investors’ flows into futures-based exchange-traded funds and limited storage capacity available for physical delivery of the commodity, a Bank for International Settlements study said.

The study appears to be one of the first into possible reasons behind the collapse of the global benchmark into negative price territory. Democrats on the US Commodity Futures Trading Commission called unsuccessfully last year for such an analysis before adoption of a rule limiting speculation in energy, agricultural and metals commodities.

Posted yesterday, the BIS study said: “Empirical evidence is consistent with our key hypothesis that investor inflows into ETFs can depress futures prices if storage is constrained”.

— $55 collapse —

On April 20, 2020, the WTI benchmark opened at $17.73 a barrel on the New York Mercantile Exchange and closed at negative $37.63 – a collapse of more than $55.

The drop occurred as oil prices crashed during the early days of the pandemic, drawing in a flood of small investors, the BIS study said.

Investors invested about $565 million into the biggest oil ETF on April 20, equivalent to about 4 million barrels of WTI crude per hour. That’s 20 percent of the “theoretically available” storage capacity, the study said.

While influx to ETFs might normally raise futures prices, these prices can fall if futures bought by ETFs are settled through physical delivery of the commodity, and storage capacity at the delivery point is strained.

The main US-traded WTI contract settles with physical delivery of the crude oil at an oil production hub in Cushing, Oklahoma.

— Storage costs —

With physical deliveries pouring in, storage costs can skyrocket, pushing the spot price below zero, the study said.

“Most likely, limited storage capacity at the WTI futures delivery point in Cushing, Oklahoma compelled investors without storage access to pay buyers to avoid taking physical delivery,” it said.

Small investors are probably less likely than hedge funds to realize that large ETF purchases can trigger this counterintuitive dynamic that results in falling prices, the study said.