Commissioner Blasts CFTC's 'Incomplete' Oil Crash Report

By Dean Seal
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Law360 (November 24, 2020, 9:05 PM EST) -- A member of the U.S. Commodity Futures Trading Commission said Tuesday the agency's long-awaited report on April's historic oil futures crash failed to provide a "meaningful understanding" of what caused prices to plunge into negative territory.

Dan Berkovitz, one of the five-member regulator's two Democratic commissioners, did not mince words when he said the "incomplete and inadequate" report released one day earlier was nothing more than a "general recitation of economic conditions in the weeks and days leading up to April 20," the day the price of a U.S. futures contract for delivery of crude oil in May fell as low as -$40 a barrel.

The agency acknowledged Monday that while its report provided "background, context and observations," it stopped short of drawing any conclusions about what caused the jaw-dropping plummet, though rumors have circulated that the agency is still investigating potential bad actors.

"While some may have hoped for a more definitive analysis, we simply cannot provide that at this time — just as we cannot confirm or deny media reports of investigations tied to these events," agency Chairman Heath P. Tarbert said in a statement late on Monday.

Berkovitz followed the late-Monday release of the "interim staff report" with a public statement on Tuesday arguing that the "issuance of an incomplete preliminary report is a disservice to the public, market participants, and small and large businesses that depend on a reliable crude oil futures benchmark for contract pricing, risk mitigation and price discovery."

"By leaving out important facts and analysis, the 'interim, preliminary observations' in the report do not provide the public with a meaningful understanding of the events of that day and their implications for our markets," he said.

The agency's report took a look at the circumstances leading up to the April 21 expiry date for May 2020 West Texas Intermediate light sweet crude oil futures contracts, which declined a record 306% on April 20.

At the time, the crash was attributed to a worldwide collapse in oil demand due to the COVID-19 pandemic and a lack of storage for crude oil at a facility in Cushing, Oklahoma, where the oil is delivered, though the unprecedented collapse has also raised concerns that some form of market manipulation was at play. In August, a putative class action accused at least a dozen traders at Vega Capital London Ltd. of working together to sell off those future contracts on the New York Mercantile Exchange just before the crash.

The U.S. commodities regulator said Monday it had identified "fundamental factors that coincided with and may have influenced" the crash, including an oversupplied global crude oil market in early 2020, the "unprecedented reduction in demand" caused by the COVID-19 pandemic, and storage concerns.

The agency also noted "a number of technical factors related to market structure" that could have had an impact but said "a root cause analysis evaluating individual price movements was beyond the scope of this report."

"Nevertheless, we believe it is in the public interest to be transparent with the substantial information we do have and can share at this point in time," Tarbert said in Monday's statement.

Berkovitz responded in his own statement that as the regulatory body responsible for watching the derivatives market, the CFTC owed more to market participants.

"The report states that these fundamental and technical factors 'coincided with' the extreme price movements of April 20, and 'may have influenced' those prices," he said Tuesday. "But correlation — and even more so, coincidence — does not mean causation."

The commissioner particularly decried the report for failing to analyze the disconnect between the futures contract price and price of crude oil in the physical market on April 20, insufficiently analyzing the availability of storage at the Cushing facility, and not spending enough time on the 20-minute period on April 20 when the price went from $0 to -$39.55 per barrel.

"The commission should continue to analyze the events of April 20 and provide a complete and accurate report to the public as soon as possible," Berkovitz said.

--Editing by Janice Carter Brown.

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