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 of 180% in Brent crude 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 Crude Oil Brent – Cash, 180% 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 June contract. In the same way, if you have a short position on the Brent cash instrument, 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 Brent crude oil for deliveries in May, which became due, was rolled on to the next futures contract (June). There was a surcharge of around $4 from 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 Crude Oil Brent – Cash was rolled to the next forward contract, there was only a surcharge of 15 cents. This time it's gone up to $4. These costs will be distributed as holding costs until the next rollover date on 29 April.
In a rising forward curve (contango) there is a negative cost of carry for long positions. Since the forward curve rose very sharply at the time of the rollover, the high holding costs for traders with a long position on Crude Oil Brent – Cash is around 180% on an annual basis. At the same time, this also results in holding cost credits for traders with a short position, of around 175% per annum.
How long will the situation last?
From the trading platform’s product overview, you can see the next rollover date of a forward contract. The rollover date on the Crude Oil Brent June forward is 29 April. Until then, the holding rate for Crude Oil Brent – Cash will be around its current level.
What are your options as a trader?
If you’re looking to ‘buy’ because you believe the price of oil is going to rise, you could trade on an alternative instrument, such as Crude Oil West Texas (WTI) – Cash. When the March forward contract for Crude Oil West Texas was rolled a few days ago, the price difference wasn't as big as it was in Brent crude. The holding cost rates in Crude Oil West Texas – Cash are at around 23% annually for traders with a long position and around 18% for those with a short position. That is still very high, but not as dramatic as with Crude Oil Brent – Cash. However, it’s important to remember that the price of WTI can be influenced by different factors to crude oil of the Brent variety. WTI, for example, could react more strongly to the relationship between supply and demand in the US market.
If you choose to go short, you will receive daily holding cost credits. Traders preferring to go short on oil will receive holding cost credits, currently around 175% pa. Holding costs credits are applied to applicable trading accounts for positions held after 10pm (UK time), down to the calendar day. Remember that any gains from holding cost credits could be exceeded by losses if the price were to increase.
Another option could be to trade forward instruments, which are not subject to holding costs. If you prefer to choose when to roll from one contract to the next one, you could trade on a forward instrument. Crude Oil Brent forward spread bets and CFDs can currently be traded for the months of June, July, August and September.
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.
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