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Power & Pipes

FERC, CFTC, and State Energy Law Developments

The Commodity Futures Trading Commission (CFTC) indicated on April 24 that it is conducting a review of the $40-per-barrel plunge in the WTI crude price that occurred on April 20. The CFTC stated that it is conducting the review to understand why the pricing happened, to ensure that the market functioned properly, and to rule out foul play.

As market participants are no doubt aware, the WTI May contract ultimately settled at negative $37.63 at the close of April 20. That price occurred just the day before the May contract expiry, which reflects the market realization that traders holding long May futures positions must either be prepared to take delivery of the physical WTI following expiry and settlement or find a buying counterparty through which the long position could be liquidated. Given the ongoing international production dispute, the collapse of domestic demand, and the tight storage market at Cushing, Oklahoma (and elsewhere), the inability to take delivery seemingly prompted the historic price crash.

The CFTC’s inquiry and/or investigation is likely to focus on whether legitimate market forces (such as those noted above) are entirely responsible for the resulting May WTI contract prices. Likewise, the CFTC is expected to consider whether any improper or illicit trading activity contributed to the resulting prices.

It remains to be seen whether the CFTC intends to conduct an industry-wide formalized investigation similar to the CFTC’s 2008 National Crude Oil investigation. Alternatively, the CFTC’s review and analysis could be facilitated through more informal discussions with market participants active in the WTI contract market. In either case, the industry awaits the findings of the CFTC and any next steps that may arise due to this inquiry.