(Bloomberg) — It was evident from the very beginning on April 20 that the oil market was headed for trouble.
Frantic sell orders had been pouring in overnight and any traders who connected to the Nymex platform that morning could see a bloodbath was coming. By 7 a.m. in New York, the price on a key futures contract — West Texas Intermediate for May delivery — was already down 28% to $13.07 a barrel.
Thousands of miles away, in the Chinese metropolis of Shenzhen, a 26-year-old named A’Xiang Chen watched events unfold on her phone in stunned disbelief. A few weeks earlier, she and and her boyfriend had sunk their entire nest egg of about $10,000 into a product that the state-run Bank of China dubbed Yuan You Bao, or Crude Oil Treasure.
As the night wore on, A’Xiang began preparing to lose it all. At 10 p.m. in Shenzhen — 10 a.m. in New York — she checked her phone one last time before heading to bed. The price was now $11. Half their savings had been wiped out.
As the couple slept, the rout deepened. The price set new low after new low in rapid-fire succession: the lowest since the Asian financial crisis of the 1990s, the lowest since the oil crises of the 1970s, the first time ever below zero.
And then, in a 20-minute span that ranks among the most extraordinary in the history of financial markets, the price cratered to a level that few, if any, thought conceivable. Around the world, Saudi princes and Texan wildcatters and Russian oligarchs looked on with horror as the world’s most important commodity closed the trading day at a price of minus $37.63. That’s what you’d have to pay someone to take a barrel off your hands.
Many things about the explosive, flash-crash-like nature of the sell-off are still not fully understood, including how big a role the Crude Oil Treasure fund played as it sought to get out of the May contracts hours before they expired (and which other investors found themselves in the same position). What is clear, though, is that the day marked the culmination of the oil market’s most devastating crisis in a generation, the result of demand drying up as governments around the world locked down their economies in an attempt to manage the coronavirus pandemic.
For the petroleum industry, it was a grimly symbolic moment: The fossil fuel that helped to build the modern world, so prized it became known as “black gold,” was now not an asset but a liability.
“It was mind-bending,” said Keith Kelly, a managing director at the energy group of Compagnie Financiere Tradition SA, a leading broker. “Are you seeing what you think you’re seeing? Are your eyes playing tricks on you?”
U.S. ETF Pain
While the deeply negative prices of that Monday were largely limited to the U.S., and in particular the soon-to-expire WTI contract for May delivery, the world felt the shockwaves, with ripple effects dragging global prices to the lowest since the late 1990s.
Traders are still piecing together the confluence of factors that led to the collapse. And regulators are scrutinizing the issue, according to people familiar with the matter.
For small-time investors in Asia like A’Xiang who bet enthusiastically on oil, though, it has been a reckoning.
She awoke to a text at 6 a.m. from Bank of China informing her that not only had their savings been lost but that she and her boyfriend may actually owe money.
“When we saw the oil price start plunging, we were prepared that our money may be all gone,” she said. They hadn’t understood, she said, what they were getting into. “It didn’t occur to us that we had to pay attention to the overseas futures price and the whole concept of contract rolling.”
In all, there were some 3,700 retail investors in Bank of China’s Crude Oil Treasure fund. Collectively, they lost $85 million.
Soon, events would catch up with mom-and-pop American investors who had made much the same bet as A’Xiang — that oil had to go back up — by buying the United States Oil Fund, an exchange-traded fund known as USO.
That fund, into which investors poured $1.6 billion the previous week, hadn’t been holding the May WTI contract on Monday. But the rout sparked a chain reaction in the market that burned these investors, too.
The day’s events were set in motion more than two weeks earlier, with the pandemic shattering economies and stalling demand for oil: flights were grounded; traffic jams disappeared; factories ground to a halt.
The below-zero price scenario was, in some corners of the market, starting to be considered. On April 8, a Wednesday, CME Group Inc, which owns the oil-futures exchange, advised clients that it was “ready to handle the situation of negative underlying prices in major energy contracts.”
That weekend, producing nations led by Saudi Arabia and Russia finalized their response to the crisis: a deal to slash production by 9.7 million barrels a day, amounting to a tenth of global production. That wouldn’t be nearly enough. Refineries started shutting down. Buyers for cargoes of oil for immediate delivery in physical markets disappeared.
Futures prices remained, for a while, relatively steady.
That was in part thanks to folks like A’Xiang. In China, investors large and small were betting on higher commodity prices, believing the world would overcome the virus and that demand would bounce back. Bank of China branches posted ads on Wechat, showing an image of golden barrels of oil under the title “Crude oil is cheaper than water”.
Yet on April 15, CME offered clients the ability to test their systems to prepare for negativity. That’s when the market really woke up to the idea that this could actually happen, said Clay Davis, a principal at Verano Energy Trading LP in Houston.
“That’s when the dam broke,” he said.
By the time Monday April 20 rolled around, most ETFs and other investment products — though not the Crude Oil Treasure fund — had shifted their position out of the May WTI contract into the next month.
Futures contracts are settled by physical delivery, and if you happen to get stuck with one when it expires, you become the owner of 1,000 barrels of crude. Rarely does it come to that.
But now it was.
The physical settlement for the benchmark WTI takes place at Cushing, Oklahoma. When storage tanks there fill up, the price on the expiring contract can plunge and become disconnected from the global market. With demand evaporating, inventories at Cushing were soaring. In March and April, they climbed 60% to just under 60 million barrels, out of a total working capacity of 76 million –- and analysts reckon much of the remaining space is already earmarked.
So on the crucial Monday, the penultimate day of trading in the May WTI contract, there were precious few traders able or willing to take physical delivery.
Much of the market was focused then on the settlement price, determined at 2:30 p.m. in New York. Investment products –- including Bank of China’s –- typically seek to achieve the settlement price. That often involves so called trading-at-settlement contracts, which allow oil traders to buy or sell contracts ahead of time for whatever the settlement price happens to be.
On that afternoon, with trading volumes thin and sellers outnumbering buyers, the trading-at-settlement contracts quickly moved to the maximum discount allowed, of 10 cents per barrel. For a period of around an hour, from 1:12 p.m. until 2:17 p.m., trading in these contracts all but dried up. There were no buyers.
The result was the carnage of that afternoon. At 2:08 p.m., WTI turned negative. And then, minutes later, sank to as low as minus $40.32 before rebounding slightly at the close.
“The trading at settlement mechanism failed,” said David Greenberg, president of Sterling Commodities and a former member of the board at Nymex. “It shows the fragility of the WTI market, which is not as big as people think.”
Prices in the U.S. physical market, set by reference to the WTI settlement, also plunged, with some refiners and pipeline companies posting prices to their suppliers as low as minus $54 a barrel.
Bank of China’s investment product offers an explanation of why the move below zero was so dangerous. The bank had demanded investors like A’Xiang put up the entire cost of what they were buying in advance. That meant the bank’s position looked risk-free.
But not if prices dropped below zero: then there wouldn’t be enough money in the investors’ accounts to cover the losses.
The bank had a total position of about 1.4 million barrels of oil, or 1,400 contracts, according to a person familiar with the matter. It wound up having to pay about 400 million yuan ($56 million) to settle the contracts.
Across the investing world, others were faced with similar risks. ETFs could be bankrupted if the price of the contracts they held went below zero. Facing that possibility, they shifted a large chunk of holdings into later delivery months. Some brokers barred clients from opening new positions in the June contract.
The moves amounted to a new wave of selling that swept across oil markets. On Tuesday, the June WTI contract plunged by 68% to a low of just $6.50. And this time it was not limited to U.S. contracts: Brent futures also plunged, hitting a 20-year low of $15.98 on Wednesday, driving the price of Russian, Middle Eastern and West African oil that is priced relative to it to levels near zero.
CFTC’s Top Priority
Harold Hamm, chairman of Continental Resources Inc., called for an investigation, saying that the dramatic plunge in the last minutes of Monday “strongly raises the suspicion of market manipulation or a flawed new computer model.”
Within the Commodity Futures Trading Commission, unpacking what occurred during those final minutes of trading on April 20 has since become top priority, according to people familiar with the matter. While reviews and investigations into what occurred are just beginning, thus far, top officials believe the moves were likely the result of a confluence of economic and market factors, rather than the result of market manipulation.
An issue the CFTC is exploring is whether the storage capacity data posted by the U.S. Energy Information Administration accurately reflected the actual availability of space, two of the people said.
“The temporarily negative price at which the WTI Crude futures contract traded earlier this week appears to be rooted in fundamental supply and demand challenges alongside the particular features of that futures product,” CFTC Chairman Heath Tarbert told Bloomberg News.
Nonetheless, he added: “CFTC is conducting a deep dive to understand why the WTI price moved with the velocity and magnitude observed, and we will continue to oversee our markets’ role in facilitating convergence between spot and futures prices at expiration.”
The CME, for its part, argues that Monday’s plunge was a demonstration of the market working efficiently. “The markets worked exactly how they’re supposed to do,” CEO Terry Duffy told CNBC. “If Hamm or any other commercials believe that the price should be above zero, why would they have not stood in there and taken every single barrel of oil if it was worth something more? The true answer is it wasn’t at that given moment in time.”
Whoever is right, the events of the week have changed the oil market forever.
“We witnessed history,” said Tamas Varga, an analyst at brokerage PVM. “For the sake of oil-market stability,” this “should not be allowed to happen again.”
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Son of 2 Portapique victims says 2011 warning on gunman should have prevented attack – CBC.ca
The son of two people killed in last month’s mass shooting in Nova Scotia believes a 2011 warning to police that gunman Gabriel Wortman had a stash of guns and wanted “to kill a cop” should have prevented the tragedy from ever happening.
The tip, according to records recently obtained by CBC News, was sent to police agencies across Nova Scotia, but RCMP can’t say what, if anything, was done with it.
“I’m angry more than anything. I’m angry that 22 people lost their lives and I really, truly believe that this could have been prevented,” said Ryan Farrington, whose mother and stepfather, Dawn Madsen and Frank Gulenchyn, were killed in the April 18-19 massacre.
Farrington’s parents lived in Portapique, N.S., and moved from Oshawa, Ont., 10 years ago. Farrington’s mother was originally from Nova Scotia and always wanted to move back. The couple loved living by the ocean.
Farrington said there are still a lot of unanswered questions about the tragedy, as well as the 2011 tip.
An RCMP spokesperson said the force typically only keeps warnings like that for two years.
“We can’t speak about specifics of the follow-up to the 2011 bulletin because our database records have been purged as per our retention policies,” Cpl. Jennifer Clarke said in an email.
“Preliminary indications are that we were aware and at minimum provided assistance to [Halifax Regional Police], which aligns with the RCMP’s approach for such enquiries (sic).”
The tip was initially sent to the Truro Police Service, who then shared it with the Criminal Intelligence Service of Nova Scotia, a network of policing agencies that includes the RCMP.
Halifax Regional Police did investigate the tip at the time because Wortman has a home in Dartmouth, but determined any information about weapons was related to his cottage property in Portapique, which was outside its jurisdiction. Halifax Regional Police said that information was shared with the RCMP.
“I don’t understand why [the 2011 bulletin] would be erased after two years, knowing that there is a highly volatile person in the area, especially mainly with the weapons being at his Portapique addresses,” Farrington said.
He said he was told by RCMP that the Truro police had information that could have prevented the massacre, but that it wasn’t shared with them. The Truro Police Service said they never had any direct dealings with Wortman, who lived outside their coverage area, but shared all the information available nine years ago with other police agencies because of how serious it was.
The documents obtained by CBC through access to information show that one day after the 2011 bulletin, someone at the RCMP followed up with Cpl. Greg Densmore, the Truro officer who wrote the officer safety bulletin. In that exchange Densmore passed along details about the truck and jeep Wortman is believed to have used to drive between Dartmouth and Portapique.
“There’s just so much we need to know and we’re not getting answers,” Farrington said.
He hopes the federal government calls a public inquiry that would address questions such as what the RCMP knew and when, how Wortman was able to bring in weapons illegally across the Canada-U.S. border, how he was able to get a police uniform and outfit his vehicle to look like an RCMP cruiser.
Nova Scotia Justice Minister Mark Furey told CBC’s Mainstreet on Friday that an inquiry into the shooting should be handled by the federal government because there are limits to what the province could do.
Furey, who is a retired Mountie, said many of the major players involved in the situation are federal agents, including the RCMP, the Canada Border Services Agency and the firearms registry.
He said an inquiry should be collaborative so the agencies that answer to different levels of government would be compelled to answer questions and implement any recommendations made.
Furey would not say if Nova Scotia would seek an inquiry if the federal government doesn’t.
“Those would be circumstances I would address at the time,” he said.
If you are seeking mental health support during this time, here are resources available to Nova Scotians.
Alberta handing out masks at drive-thrus – Canada News – Castanet.net
Alberta is planning to distribute 20 million non-medical masks for free at hundreds of drive-thru fast-food restaurants.
Health Minister Tyler Shandro says it’s one more way to keep Albertans safe as the economy reopens following shutdowns forced by COVID-19.
“As the province relaunches and we all adapt to our new normal, we all may sometimes find ourselves where physical distancing may not be possible,” Shandro told a news conference Friday.
“For example, riding transit in the province or shopping … where it may be difficult to maintain two metres between people at all times.
“Mask use is not mandatory, but we would like Albertans to have the option of wearing a mask if they choose.”
Shandro said that starting in early June, people will be able to use drive-thru lanes at McDonald’s, A&W and Tim Hortons to pick up single use, three-layer, non-medical masks designed to filter germs and pollution particles.
The masks come in packages of four, and one package will be handed out per person.
No food purchase is necessary to obtain them, said Shandro, and no money is going to the restaurant chains for pick-up or distribution.
At just below $1 per mask, the province is spending just under $2 million on the project. About $350,000 will be spent on getting masks to remote areas that don’t have those restaurants.
But Shandro said 95 per cent of Albertans live within 10 kilometres of a drive-thru. The participating businesses have about 600 drive-thrus in the province.
He said the masks can be picked up only in drive-thru lanes, not inside the restaurant, to maintain physical distancing.
He acknowledged that four masks per person is not enough in the long term, but will help some people get through the crunch of the crisis and that Albertans are encouraged to source their own masks in the future.
Asked how he hopes to prevent hoarding, Shandro said, “We’re not asking for folks to bring in their health-care card and get it punched to show they’ve already picked up.
“This is on the honour system.”
He said it’s acceptable for people to pick up masks on behalf of those who can’t do so in person.
Tanya Doucette, who operates eight Tim Hortons franchises in central Alberta, said customers were understanding when her staff closed in-store service and moved to drive-thru and delivery service only.
She expects the same will happen as they continue reopening in-store service to half capacity and begin distributing masks.
“We won’t be asking our team members to police the program. We’ll just ask them to follow the guidelines as they are set out by the province,” said Doucette in an interview.
“I think we can count on Albertans to utilize the program in the spirit it is meant.”
Alberta has completed the first phase of its economic relaunch. Retail shops, restaurants, day cares, barber shops, hair salons, farmers markets and places of worship have reopened with some conditions.
Outdoor gatherings are currently limited to 50 people, and indoor gatherings to 15.
The next phase is scheduled to begin June 19 with the reopening of stage and movie theatres, spas and services like manicures, pedicures and massages.
‘Final nail in the coffin’ of 2020 cruise ship season in Victoria due to COVID-19 – CHEK
Victoria’s cruise ship season has come to an end following an announcement from Ottawa Friday.
“Cruise ships with overnight accommodations and a capacity of more than 100 persons, that includes passengers and crew, will be prohibited from operating in Canadian waters until at least October the 31st,” said federal Minister of Transport Marc Garneau.
Around $130 million dollars is now gone from Victoria’s economy, and around 800 jobs are also lost as a result.
READ MORE: Cruise ships carrying 100 or more passengers banned in Canada until October
Greater Victoria’s Harbour Authority agrees with the decision following concerns about COVID-19, but says the news is still devastating.
They are also asking for assistance to keep Victoria’s tourism industry going.
“It puts the final nail in the coffin for the 2020 cruise season,” said Harbour Authority CEO Ian Robinson.
“It’s very difficult to absorb. We were looking forward to having another record cruise season. There were well over 300 ships calls bringing in over 770,000 passengers. It was going to be another record year. Cruise is extremely important economically.”
The harbour authority relies on the season for 70 per cent of their revenues. They’ve been forced to lay off almost 50 per cent of their staff but say they will be able to make it through the crisis. But residents could be impacted in more ways than just less business.
“We will get through this as an organization, but there could be some impacts to residents around the properties we are responsible for stewarding,” said Robinson.
But their biggest worry is about small and medium businesses
Fisherman’s Wharf is one of the bustling spots when ships visit. Summer is what keeps many of the shops going through the tough winter season.
“It’s a big hit,” said Jackson Avio, owner of Jackson’s Ice Cream.
“Maybe half of our business comes from cruise ships, in our busiest months July and August. I feel bad for the students that I would normally hire. We are just going to do it with a skeleton staff.”
Victoria’s Barb’s Fish & Chips has been a staple for 35 years. They say the ships only make up to around 15 per cent of their business, but with few other ways for visitors to come this summer, they are expecting it to be tough.
“I think survival is the name of the game is 2020. Ultimately recovery will be years,” said owner Ian Poyntz.
Locals will be critical to keeping the shops going.
The harbour authority is calling on both the federal and provincial governments to help keep Victoria’s tourism economy afloat.
“Quite frankly I don’t think its enough I think governments at all levels,” said Robinson.
“We have to focus in on what type of financial support can be available to those small and medium-sized tourism operators so they can get through the fall and winter, so they are here next year for when tourism and cruise returns.”
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