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The carnage in WTI crude oil prices has continued today, and the June contract was down by 24% on the day and trading at $15.51 at the time of writing.
Today’s slide follows yesterday’s annihilation of the May contract, which expired at negative levels. Usually, you would need to pay something for crude oil, however, because of limited storage capacity and low demand on the heels of the Coronavirus crisis, buyers of crude oil had to pay to get rid of their holdings.
The demand is anticipated to remain low until June when the world economy is anticipated to reopen, but investors are clearly not ready to hold that risk as seen in today’s trading.
More risks loom for the exchange and traders
The large ETF, USO, has seen large inflows over the last few days, and currently holds about 30% of all open contracts in the June WTI future.
Retail investors have been betting on higher prices in the months ahead, but they appear not to understand that the ETF invests in futures contracts that need to be rolled over each month, and that there is a risk of the contract turning negative as the May contract did. The fund is also so big that it if they tried to sell their holding they would further suppress the price, and if the contract turns negative it might put the exchange at risk.
Trend remains bearish
From a technical perspective, the slide in the June 2020 contract stabilized following the slide to an intraday low of $11.66, and the risk-reward ratio for fresh short-position at the current level is weak. However, this does not have to stop the slide if people are looking to reduce risk at any price.
However, for the risk-reward-ratio aware traders, I think they will wait for a correction, and I think the next bearish down-leg could start from between the $19.34 to $23.79 interval. The $19.34 level is the 50% correction level of the slide from Friday’s high of $26.80 to the daily low of $11.66. If the price indeed turns lower in the interval above mentioned, I think the price will revisit the $11.66 low.
Crude oil price chart
By Alejandro Zambrano, Chief Market Strategist at ATFX.
