U.S. government’s report on April oil price crash won’t point fingers

By Ben Bain and Liam Vaughan on 11/22/2020

(Bloomberg) --A highly anticipated U.S. government report on the April 20 oil crash will stop short of blaming any specific traders or firms, and refrain from recommending structural changes for the crude market, said three people familiar with the matter.

The Commodity Futures Trading Commission review, which could be released as soon as next week, will chronicle the day’s unusual market dynamics and its trading flows, said the people. Yet it won’t draw a firm conclusion for what caused oil to plunge to -$37 a barrel -- the first time it ever traded at a negative price.

The document -- the product of a lengthy analysis by economists and market-oversight officials -- isn’t binding, so it won’t prevent a CFTC chief appointed by President-elect Joe Biden from pursuing tougher rules. Plus, a key factor that might influence future policy decisions wasn’t incorporated into the report: an ongoing investigation by the CFTC’s enforcement division into whether manipulative or reckless trading contributed to crude’s nosedive.

Pressure has been mounting on the CFTC to get to the bottom of what triggered the unprecedented plunge in West Texas Intermediate futures -- the world’s most-widely traded oil instrument. While prices bounced back a few hours later, retail investors, brokers and oil-producing nations were all among the day’s losers. CFTC Chairman Heath Tarbert, a Republican picked by President Donald Trump, has said the agency is conducting a “deep dive” into what happened.

A CFTC spokeswoman declined to comment.

The report will focus heavily on macroeconomic factors such as the impact that the coronavirus pandemic had on demand for oil, said the people who asked not to be named in discussing a document that isn’t yet public. It will also reference the lack of storage space in Cushing, Oklahoma, where holders of expiring WTI contracts are obligated to take physical delivery of crude, the people said.

In addition to not proposing oil-market structural reforms, the report refrains from suggesting revisions to specific contracts, the people said. The document, which still could change before it’s published, also won’t name specific firms or traders.

Since WTI’s historic plunge, market participants themselves have made changes. Many clearinghouses now limit how much of the nearest contract exchange-traded funds and passive oil funds can accumulate and models have been adjusted to account for negative prices. Meanwhile, a glut in crude that contributed to the price decline has receded and demand has bounced back with an uptick in economic activity.

Within the CFTC, the report has been the subject of fierce debate, with some officials arguing that its publication should be delayed until the agency finishes its examination into whether misconduct contributed to oil’s crash. The squabbling underscores the balancing act the agency faces in providing a swift assessment of what happened, while thoroughly probing potential wrongdoing.

A few months after the 2010 flash crash for stocks and futures, the CFTC published a joint report with the Securities and Exchange Commission that largely pinned the blame for the temporary market collapse on macro-economic conditions and a reckless order by a Kansas mutual fund. That conclusion was called into question in 2015, when the CFTC brought a case against British trader Navinder Singh Sarao suggesting his manipulative trading had helped cause the tumult.

In August, Bloomberg News reported that the CFTC, the U.K.’s Financial Conduct Authority and CME Group Inc. -- owner of the Nymex exchange where WTI contracts trade -- were examining whether actions tied to U.K.-based Vega Capital London Ltd. may have breached regulations and allowed traders at the firm to make a $500 million windfall on April 20. Vega hasn’t responded to multiple requests for comment about its trading.

Vega’s profits involved instruments called trade at settlement, or TAS, according to people familiar with the matter. When using the products, buyers and sellers agree to transact at wherever the price ends up at 2:30 pm on settlement days such as April 20, when the closing price for a monthly contract is determined. The CFTC report will discuss the TAS mechanism, the people said, but it won’t detail how trading of the instruments by any specific parties may have impacted the price of oil.

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