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Energy & Environmental Markets Advisory Committee
March 24, 2020 Meeting
The Market Intelligence Branch / Division of Market Oversight
March 24, 2020
Disclaimer
2
The views expressed represent those of staff in MIB, and do not necessarily reflect the views of the Commodity Futures Trading Commission, any of the Commissioners, the Division of Market Oversight, or other staff at the Commission. Consistent with Section 8(a) of the CEA, this presentation does not contain data or information that would separately disclose the business transactions or market positions of any person and trade secrets or names of customers.
March 24, 2020
Market Intelligence Branch (MIB)
3
Supports the Commission’s mission to promote integrity, resilience and vibrancy in the derivatives markets.
Monitors the health and structure of U.S. futures, options, swaps and the various over the counter (OTC) markets.
Highlight emerging trends.
Identifies potential systemic risks.
March 24, 2020
Scope of MIB Monitoring
4
MIB monitors characteristics of and developments in derivative markets.
• Volume and activity • Liquidity, order book depth, price, and implied volatility • Circuit breakers, limit moves (up/down), velocity triggers • Term structures, swap spreads, index activities • Convergence and spreads (cash vs. physical delivery markets) • Open interest, risk positioning • Market participant positioning and activity • Related market activities • News, industry and government reports, fundamentals, and data
March 24, 2020
Products
5
Wheat
Corn
Oats
Rice
Canola
Palm Oil
Soybeans
Grains
Soy Meal
Soy Oil
Oil Seeds
Cocoa
Sugar
Coffee
Frozen OJ
Softs
Feeder Cattle
Live Cattle
Lean Hogs
Livestock
Butter
Milk
Cheese
Dairy
Softwood
Hardwood
Rough Wood
Cotton
Fiber
Brent
WTI
Jet Fuel
Diesel
Petroleum
Gasoline
Heating Oil
Naphtha
Fuel Oil
Bio Diesel
Electricity
Iron Ore
Ethylene
Propylene
Methanol
Poly-Propylene
Chemicals
Silver
Gold
Platinum
Palladium
Precious
Copper
Aluminum
Zinc
Base Metals
Scrap Metal
Power & Gas
LNG
Solar / Other
Natural Gas
Urea
Emissions
Weather
Pollution
Carbon
Environment
Dry Freight
Wet Freight
Trucking
Freight
DAP
Sulfur
Fertilizer
UAN
Exotics
SOFR
Fed Funds
T Bonds/Notes
OIS
Interest Rate
Vanilla Rates
Swaptions
Caps / Floors
Swaps
Rate Baskets
Fed Funds
Basis
Various
FX Forwards
FX Futures
NDF
FX Options
FX
Retail FX
DXY
EM Index
NDOs
Dow Jones
S&P 500
Russell
Nasdaq
Equities
GSCI
VIX
Credit Baskets
HY Index
CDX IG
Crossover
High Vol
Credit
RMBX
ABSX
Synthetic CLOs
Lev Loan Index
CMBX
TRS Swaps
Sovereign CDS
Tranches
Synthetic CDOs
Energy & Natural Resources Banking & Finance Agriculture, Nutrition & Forestry
MIB monitors over one hundred different commodities, indices, financial derivatives markets.
March 24, 2020
U.S. Derivatives Markets
6
0
2,000
4,000
6,000
8,000
10,000
12,000
-
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
100,000
200,000
300,000
400,000
500,000
Ag Futures
Energy & Metals Futures
Total (Carried
Sub Total
Carried Forward
FX Swaps
Currency Swaps
FX Options
FRAs
Energy & M
Equity Index Futures
etals Options
Equity Index Options
Bond Options
Bond Futures
Fed Funds Futures
Eurodollar Futures
Eurodollar Options
Sub Total
351b 212b
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
0
Int. Rate Swaps & Options
Ag Options
TOTAL FUTURES
TOTAL SWAPS
TOTAL DERIVATIVES
Forward)
The U.S. derivatives markets are approximately $350- $400 trillion across futures, options and swaps (in swaps equivalents).
The notional value of open interest in futures and options in 2008 was an estimated $30 trillion. Today, it is approximately $90 trillion.
March 24, 2020
Volume
7
Futures contract volumes have reached nearly 60 million since February 20th, with significant totals each day.
0
10,000,000
20,000,000
30,000,000
40,000,000
50,000,000
60,000,000
Opt Volume Fut Volume Source: CFTC Data
U.S. Futures & Option Contracts Current and previous highest contract volume dates
March 24, 2020
Equity Index Declines
8
The velocity of the COVID-19 market sell-off is one of the most extreme in equity markets over the past one hundred years.
Wall ST Crash 1929
The Great Depression
1937-38
Flash Crash 1962
Black Monday
1987
LTCM Crisis 1998
9-11
2001
Dot Com Bubble
2000
Financial Crisis
2007-08
COVID 19
2020
0%
0%
0%
0%
0%
0%
0%
Source: CFTC data & Bloomberg -6
-5
-4
-3
-2
-1
The U.S. Equity S&P 500 Index
March 24, 2020
Equity Volatility
9
Equity volatility during the current crisis is the highest observed in the past 30 years.
0
10
20
30
40
50
60
70
80
90
3/1/
1990
11/1
/199
0
7/1/
1991
3/1/
1992
11/1
/199
2
7/1/
1993
3/1/
1994
11/1
/199
4
7/1/
1995
3/1/
1996
11/1
/199
6
7/1/
1997
3/1/
1998
11/1
/199
8
7/1/
1999
3/1/
2000
11/1
/200
0
7/1/
2001
3/1/
2002
11/1
/200
2
7/1/
2003
3/1/
2004
11/1
/200
4
7/1/
2005
3/1/
2006
11/1
/200
6
7/1/
2007
3/1/
2008
11/1
/200
8
7/1/
2009
3/1/
2010
11/1
/201
0
7/1/
2011
3/1/
2012
11/1
/201
2
7/1/
2013
3/1/
2014
11/1
/201
4
7/1/
2015
3/1/
2016
11/1
/201
6
7/1/
2017
3/1/
2018
11/1
/201
8
7/1/
2019
3/1/
2020
CBOE Volatility Index (VIX)
LTCM Dot Com 9-11
2002 Market Crash
Financial Market Crisis 2010
Flash Crash
Greece
COVID 19
Bloomberg
March 24, 2020
U.S. Government Bonds
10
U.S. government bond yields reached their lowest levels in history as domestic and international investors seek safety.
0
2
4
6
8
10
12
14
16
18
3/1/
1977
2/1/
1978
1/1/
1979
12/1
/197
9
11/1
/198
0
10/1
/198
1
9/1/
1982
8/1/
1983
7/1/
1984
6/1/
1985
5/1/
1986
4/1/
1987
3/1/
1988
2/1/
1989
1/1/
1990
12/1
/199
0
11/1
/199
1
10/1
/199
2
9/1/
1993
8/1/
1994
7/1/
1995
6/1/
1996
5/1/
1997
4/1/
1998
3/1/
1999
2/1/
2000
1/1/
2001
12/1
/200
1
11/1
/200
2
10/1
/200
3
9/1/
2004
8/1/
2005
7/1/
2006
6/1/
2007
5/1/
2008
4/1/
2009
3/1/
2010
2/1/
2011
1/1/
2012
12/1
/201
2
11/1
/201
3
10/1
/201
4
9/1/
2015
8/1/
2016
7/1/
2017
6/1/
2018
5/1/
2019
10 Yrs 30 Yrs
CFTC data
Implied Yields for 10 and 30 year Treasury Bond Futures
March 24, 2020
U.S. Government Bonds
11
The whipsaw price action registered the largest down move in history and the steepest climb of yields within a period of seven days.
0
0.5
1
1.5
2020 High
U.S. Government Bond Yields
2020 Low 2020 Low
Treasury Bills 2-Years 10-Years 30 Years Ultra Long Bond
2
2.5
2020 High 2020 High
2020 High
Perc
enta
ge
2020 High
2020 Low
2020 Low
Source : CFTC Data and Bloomberg
March 24, 2020
U.S. Dollar Demand
12
The international demand for U.S. dollars affected cross-currency basis spreads and retreated as the Fed announced increased swap facilities to major nations.
-200
-180
-160
-140
-120
-100
-80
-60
-40
-20
0
1 Year 5 Year 10 Year
Canada Switzerland China Denmark Euro U.K. Hong Kong Israel Japan Korea Malaysia Russia South Africa
Source : CFTC Data and Bloomberg
Cros
s Cur
renc
y Ba
sis (b
ps)
Cross Currency Basis Swaps Spreads (USD Libor)
March 24, 2020
Liquidity
13
• Futures liquidity and top-of-book depth have declined and spreads have widened.
• Swap spreads have expanded and liquidity has diminished.
• Foreign exchange and NDF markets have wider spreads, lower liquidity.
• Heavy activity in credit derivatives swaps with wider spreads.
March 24, 2020
Market Halts
14
Four level-one market-wide circuit breaker halts occurred in the equity markets (first since 1987), along with an increase in other market control measures, such as limit-up/limit-down bands and velocity-logic triggers.
Market Halts
0
20
40
60
80
100
120
140
2-Mar 3-Mar 4-Mar 5-Mar 6-Mar 8-Mar 9-Mar 10-Mar 11-Mar 12-Mar 13-Mar 15-Mar 16-Mar 17-Mar 18-Mar
Equities Energy Agriculture FX Metals Interest Rates
# of
hal
ts
March 24, 2020
Crude Oil Implied Volatility
15
In March, crude oil 3-month implied volatility spiked to its highest level in more than a decade as WTI hit an 18-year low on news of a breakdown in OPEC negotiations.
The 3 month implied volatility
0
20
40
60
80
100
120
140
Oct
-05
Feb-
06
Jun-
06
Oct
-06
Feb-
07
Jun-
07
Oct
-07
Feb-
08
Jun-
08
Oct
-08
Feb-
09
Jun-
09
Oct
-09
Feb-
10
Jun-
10
Oct
-10
Feb-
11
Jun-
11
Oct
-11
Feb-
12
Jun-
12
Oct
-12
Feb-
13
Jun-
13
Oct
-13
Feb-
14
Jun-
14
Oct
-14
Feb-
15
Jun-
15
Oct
-15
Feb-
16
Jun-
16
Oct
-16
Feb-
17
Jun-
17
Oct
-17
Feb-
18
Jun-
18
Oct
-18
Feb-
19
Jun-
19
Oct
-19
Feb-
20
COVID 19
Financial Market Crisis
U.S. sanctions
on Iran exports
OPEC decides to maintain
production despite low
prices
Hurricane Irene
Source : Bloomberg
March 24, 2020
Crude Oil Price Collapse
16
On March 9, 2020, WTI and global oil prices had the largest single day drop in percentage terms since the Gulf War in 1991.
0
20
40
60
80
100
120
140
160
Jun-83 Aug-85 Oct-87 Dec-89 Feb-92 Apr-94 Jun-96 Aug-98 Oct-00 Dec-02 Feb-05 Apr-07 Jun-09 Aug-11 Oct-13 Dec-15 Feb-18Source : CFTC data and Bloomberg
U.S. Crude WTI Spot Prices - Cushing
March 24, 2020
Crude Oil Daily Price Moves
17
Price volatility has moved oil prices by almost $22.50 per barrel (p/b) during this month.
20
25
30
35
40
45
50
2-Mar 3-Mar 4-Mar 5-Mar 6-Mar 9-Mar 10-Mar 11-Mar 12-Mar 13-Mar 16-Mar 17-Mar 18-Mar 19-Mar 20-Mar 20-Mar
+4%
$44.76
$ pe
r gal
lon
+1%
-3%
+10%
-4%
-10%
-4% +1% -10%
-25%
Losses Gains
-6% -24%
+24% -11%
$22.43
Source : CFTC Data
WTI Futures – Daily Price Moves
March 24, 2020
Crude Oil Demand
18
COVID-19 and the global lockdown have all but removed demand for oil, at least in the short term.
-200
Aug-19 Sep–19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 0
200
400
600
800
1000
1200
1400
Source : International Energy Agency
KBD
Mar-20
Global Oil Demand Forecast for 2020
March 24, 2020
Crude Oil Forecast
19
Supply and demand forecasts showed an oversupplied market even before OPEC+ failed to reach an agreement. Additional barrels from Saudi Arabia, U.A.E., and other OPEC+ members in 2Q 2020 will only exacerbate the global supply glut.
92.0
94.0
96.0
98.0
100.0
102.0
104.0
1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20* 2Q20* 3Q20* 4Q20*
Mill
ion
barr
els p
er d
ay
Total Supply Total Demand *Projected. Supply numbers use 4Q19 OPEC data
Source: International Energy Agency
Global Supply and Demand Forecast
March 24, 2020
Stalemate
20
Asia’s largest importers (China, India, Japan, South Korea) recovering from COVID-19. Demand expected to be low next quarter.
Russia and Saudi Arabia have the lowest oil production costs (estimated around $10 p/b).
Both countries rely heavily on oil revenues. Russian fiscal breakeven estimated to be $40 p/b. Saudi Arabia’s fiscal breakeven estimated to be near $80 p/b.
Russia is unlikely to submit to any external pressure at least until the proposed mid-April constitutional change is completed.
The U.S. oil industry has higher production costs, estimated to be around $30 p/b, directly linked to U.S. corporate well-being.
March 24, 2020
Gasoline
21
60
70
80
90
100
110
120
130
140
150
160
Cent
s per
gal
lon
April May June Dec
OPEC+ Crisis
While the Gasoline term-structure is in contango, Gasoline prices are not expected to increase materially until the end of 2020. RBOB Gasoline Term Structure
April, May, June and December Contracts
March 24, 2020
Crude Oil U.S Production
Tight oil wells have high decline rates, requiring significant new drilling to keep overall production up. Average breakeven costs for new wells in many tight oil basins are well above current market prices. Absent price appreciation, domestic crude production may fall in the coming months.
(700,000)
(600,000)
(500,000)
(400,000)
(300,000)
(200,000)
(100,000)
-
100,000
Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20
Barr
els p
er d
ay
Anadarko Appalachia Bakken Eagle Ford Niobara PermianSource: EIA Drilling Productivity Report
Legacy oil well production, select areas
22
March 24, 2020
Natural Gas Volatility
23
Natural gas volatility has doubled in the past two months, but pales in comparison to previous weather-related events. Futures prices are at a 25-year low.
0
20
40
60
80
100
120
0.00
1.00
2.00
3.00
4.00
5.00
6.00
4/2/
2018
5/2/
2018
6/2/
2018
7/2/
2018
8/2/
2018
9/2/
2018
10/2
/201
8
11/2
/201
8
12/2
/201
8
1/2/
2019
2/2/
2019
3/2/
2019
4/2/
2019
5/2/
2019
6/2/
2019
7/2/
2019
8/2/
2019
9/2/
2019
10/2
/201
9
11/2
/201
9
12/2
/201
9
1/2/
2020
2/2/
2020
3/2/
2020
Vola
tility
Dolla
rs p
er M
MBt
u
Prompt NG 30-day Volatility Source: ProphetX
Prompt NG futures prices v. 30-day volatility
March 24, 2020
ETF Markets
24
The growth of Exchange Traded Funds (ETFs) and Exchange Traded Notes (ETNs) markets has been a significant development since the past financial crisis.
0
2
4
6
8
10
12
14
16
2020Q1
2019Q4
2019Q3
2019Q2
2019Q1
2018Q4
2018Q3
2018Q2
2018Q1
2017Q4
2017Q3
2017Q2
2017Q1
2016Q4
2016Q3
2016Q2
2016Q1
2015Q4
2015Q3
2015Q2
2015Q1
2014Q4
2014Q3
2014Q2
Leve
rage
-Adj
uste
d G
ross
Exp
osur
e* ($
Bill
ions
)
Source: Bloomberg, CFTC *Gross exposures, calculated in absolute terms (long/short neutral), of energy-only ETF population
Energy ETF Leverage-Adjusted Gross Exposure
March 24, 2020
Credit Markets
25
CDS spreads on the CDX High Yield and Investment Grade indices have widened significantly to 850 and 150 bps, respectively (from 280 bps and 43 bps on Feb 12, 2020).
CDX.NA.HY.33 12/24 and CDX.NA.IG.34 06/25
0
100
200
300
400
500
600
700
800
900
8/10/2012 8/10/2013 8/10/2014 8/10/2015 8/10/2016 8/10/2017 8/10/2018 8/10/2019
CDX IG CDX HY
March 24, 2020
Credit Markets
26
A number of reference entities in the CDX NA.HY Index are trading above the current index spread of ~850 bps, with most energy companies trading at a spread well above it. There are ten entities with spreads above 2500 bps, of which six are energy companies.
-
500
1,000
1,500
2,000
2,500
0 10 20 30 40 50 60 70 80 90 100
CDX.NA.HY.33 12/24 – Reference Entities
March 24, 2020
High Yield Corporate Bonds
27
The energy sector represents a sizeable portion of the ~ $2.5 trillion high yield bond market. Airline, leisure, and hotel sectors, also impacted by COVID-19, represented a sizeable portion of the market.
0%
2%
4%
6%
8%
10%
12%
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Ener
gy In
dust
ry
% o
f Tot
al
Debt
Mar
ket V
alue
($ T
rillio
ns)
Bloomberg Barclays Global High Yield Index (LG30TRUU)Bloomberg Barclays High Yield Energy (BHYETRUU)% Energy Industry Composition of Total High Yield Bond Market
High Yield Bond Market Value
March 24, 2020
Leveraged Loans
28
The leveraged loan market has grown to over $1 trillion. The current environment has noticeably impacted leveraged loan market prices.
S&P / LSTA U.S. Leveraged Loan Index
Source : Bloomberg
50
60
70
80
90
100
110
Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20
Financial Crisis
COVID-19
China Slowdown U.S. Credit Downgrade
U.S. Credit Market Turmoil
March 24, 2020
Private Credit
29
The private credit markets rapidly expanded in recent years as large banks reduced exposure to smaller and riskier borrowers. As of June, 2019, Assets Under Management (AUM) was around $812 billion.
0
100
200
300
400
500
600
700
800
900
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Asse
ts U
nder
Man
agem
ent (
$B)
Source: Bloomberg/Preqin
(H1)
Private Credit AUM
March 24, 2020
Private Credit
30
Investor composition of the private credit markets is quite diverse with broad representation from both institutional and private wealth funds actively participating.
Source: Bloomberg/Preqin
Institutional 84%
Private Wealth 16%
Asset Managers 6%
Banks & Investment Banks 5%
Fund of Funds 5%
Other 9%
Family Office 9%
Wealth Manager 7%
Private Pension Funds 16%
Foundations 13%
Public Pension Funds 12% Insurance
9%
Endowments 9%
Lenders to private credit markets
March 24, 2020
Conclusions
31
The derivatives markets appear resilient in the face of lower liquidity and historic volatility and volume.
Economic threats remain elevated.
MIB will continue to monitor and evaluate.
March 24, 2020 32
QUESTIONS?
