We are in truly unusual times. The shutdown of large parts of the global economy has temporarily created a huge drop in demand for oil, which has had the knock-on effect of causing issues with the pricing structure. This has led to exceptional holding costs on oil spread bets and CFDs.
In this article, we aim to clarify why this is the case and potential options traders have.
It’s worth noting that if you have a long position on our crude oil ‘cash’ instruments, the CMC holding cost is not the true holding cost, as the vast majority of that rate will be earned back in your running profit/loss, as the cash price gets closer to the front month future contract. In the same way, if you have a short position, the vast majority of the rate received in holding costs will be lost in your running profit/loss.
In summary, the holding costs on these cash commodities is there to balance out an artificial profit or loss, as the cash and forward contracts converge.
The rise in holding costs
‘Cash’ spread bets and CFDs offer traders the advantage of being indefinitely invested in raw materials, such as oil. Commodity investments in fact do always have a final maturity, which occurs when the respective futures contract on the relevant futures exchange expires. There is then final settlement and preparation of the delivery of the respective raw material, to a factory, for example.
Traders have the option of using both cash and forward oil instruments. You don’t have to worry about suddenly finding a delivery of pork bellies in your garden, and can remain invested indefinitely, although the actual underlying trade usually only takes place on a monthly basis. To make this possible, certain processes take place in the ‘machine room’.
Specifically, this means that the futures contract for crude oil for deliveries in May, which became due, was rolled on to the next futures contract (June). There was a surcharge of several dollars between the May to June future instrument. This price difference can be explained by the fact that the markets assume a temporary weakness in demand and a temporary oversupply of oil. The shutdown in the economy creates prices for immediate oil deliveries that are far cheaper than prices for future deliveries.
When you roll from one futures contract to another, there are additional charges, and we are dealing with a so-called contango futures curve. The previous time a crude oil cash instrument was rolled to the next forward contract, there was only a surcharge of 15 cents. This time it's considerably more. These costs will be distributed as holding costs until the next rollover date.
How long will the situation last?
From the trading platform’s product overview, you can see the next rollover date of a forward contract. Until then, the holding rate for our crude oil cash instruments will be around its current level.
What are your options as a trader?
We suggest you trade forward instruments, which are not subject to CMC holding costs. Remember these products have rollover / expiry dates, so make sure you have specified your platform settings accordingly.
Check rollover dates on forwards
When trading on raw materials – specifically the cash instruments – it’s important to note the rollover dates of the respective forwards. You can view these from the product library in the platform. Just enter ’crude oil’ in the search bar to view all the prices for Brent and WTI cash and forward instruments, for example. You can then select the product overview option of the next forward instrument to find out the date and time of the rollover.