Continental Resources Inc. wants a federal regulator to investigate the Chicago Mercantile Exchange (CME) for possible market manipulation or other systemic failures related to a staggering fall in May prompt month WTI prices that left oil prices in negative territory for the first time ever.
In an April 21 letter, Harold Hamm, chairman and founder of the U.S. shale pioneer Continental Resources, asked the Commodity Futures Trading Commission (CFTC) to investigate into the potential manipulation, failed systems or computer programming failures at the CME and the circumstances that allowed the unusual negative crude prices. Much of Hamm’s letter focuses on what he sees as either peculiarities or failures on CME’s part as oil prices plunged in the last 22 minutes of trading on April 20.
“The sanctity and trust in the oil and all commodity futures markets are at issue as the system failed miserably and an immediate investigation is requested and, we submit, is required,” Hamm wrote.
“In addition to a review of practices at the CME, we strongly urge the market to change to a daily weighted average price to reflect the trading value experienced throughout the trade month.”
Hamm has also lodged a complaint with the CME. He points to the CME’s announcement near the end of trading on April 20, which preceded the run on prices.
CME Group Inc. said that Continental's allegations were factually inaccurate.
“CME Group markets worked as designed. We monitor our markets at all times and fully prosecute behavior that violates our rules,” according to a written statement. “Our futures prices reflect fundamentals in the physical crude oil market driven by the unprecedented global impacts of the coronavirus, including decreased demand for crude, global oversupply, and high levels of U.S. storage utilization.”
CME said that after providing advance notice to its regulator and the marketplace in early April, “CME Group accommodated negative futures prices on WTI on April 20 so that clients could manage their risk amid dramatic price moves, while also ensuring the convergence of futures and cash prices.”
The price of oil dropped $40 in the final 22 minutes of trading on April 20—including a three-minute span before closing in which prices sank by $25/bbl, Hamm’s letter said.
“Not only did WTI crude futures trade negative, they settled at a bizarre minus $37.63” per barrel, Hamm said in the letter.
On April 20, CME declared that WTI futures could trade negative, which Hamm said sent the May contract price plummeting to about $4 per barrel.
“Notably the CME chose to announce on April 8, 2020, that it had been testing plans to support the possibility of negative options such that if any month, WTI oil futures settle at a price between $8 and $11 a barrel that it could switch to a different pricing model that would allow for negative pricing,” Hamm wrote.
CME’s announcement said, in part, that, “CME Clearing may switch its pricing and margining options models from the existing models to the Bachelier model, currently utilized in numerous spread options products where negative underlying prices and strike levels are a regular occurrence. If any WTI Crude Oil futures prices settle, in any month, to a level below $8/bbl, CME Clearing will move to the Bachelier model for all WTI Crude oil options contracts as well as all related crude oil options contracts effective the following trade date.”
The announcement added that: “CME Clearing will send out an advisory notice with one day notice before any implementation occurs with all appropriate details.”
Hamm’s letter said that the WTI prompt month May contract price settled at $18.27 per barrel on April 17. Three days later, the WTI prompt month May crude oil contracts had lost $55.90 in value—a stunning 306% drop—to minus $37.63 per barrel.
In his letter, Hamm also noted that WTI trading volume was low before the CME announcement but picked up activity afterward.
“Prior to the CME’s announcement regarding negative settlements, the contract was trading positive,” Hamm said. “The WTI futures price for the May contract remained positive until approximately 1:08 p.m. CDT when it began dropping precipitously.”
Low prices from weakened demand amid a pandemic have already caused E&Ps to recalibrate their plans. Rystad Energy said April 22 that fracking operations will likely decline 60% this month.
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