Update: Investors in BoC’s Crude Product Rage at Huge Loss Amid Oil Price Turmoil

Investors in a crude futures product sold by Bank of China Ltd. (BoC) lost millions of yuan in the collapse of global crude prices, and they blame the bank for the losses amid the market turmoil.

BoC suspended clients from opening new positions in its Yuan You Bao product starting Wednesday, which is based on overseas crude oil futures, including West Texas Intermediate (WTI) and Brent contracts, citing current market risks, the bank said in a statement (link in Chinese). It will still allow clients to close positions.

The bank made the decision after the value of the WTI crude May futures contract plunged to a record low of a negative $37.63 a barrel Monday, the day before the last trading day of the front-month contract. A negative value means producers would have to pay buyers to take delivery of oil.

On Tuesday, BoC suspended trading of the oil futures product’s WTI-linked contracts for one day.

Monday was the worst day for the price of oil in at least a generation. It also happened to be the day that BoC had set for investors of the product’s WTI-linked contracts to settle up, either by simply closing their positions or rolling over their contracts — opening positions for June contracts while closing their May contracts to maintain their investments. In either case, investors with long positions suffered losses.

BoC said Wednesday that investors still need to settle their positions at the Monday WTI settlement price, and the bank has completed settlement of all May contracts.

One investor took a 9.2 million yuan ($1.3 million) loss on a 3.9 million yuan investment in the product, according to a document circulating online. The oil price slump left the investor owing 5.3 million yuan to the bank.

Some investors were livid. But multiple bank traders told Caixin that the settlement date was set well in advance, so it wasn’t as if the bank had suddenly changed it. A bank trader said this was a situation where the “trading mechanism encountered an extreme situation in the extreme.”

It remains unclear how much BoC lost.

Industrial and Commercial Bank of China (ICBC) and China Construction Bank also offer similar products. But the other banks set their settlement date five working days before the last trading day of the underlying contract. For the WTI May contract, the settlement date was April 14, a week earlier than BoC date and the WTI May contract crash.

Actually, most major global crude investors rolled over their May contracts earlier this month as markets have been hammered by the impact of the coronavirus pandemic on the global economy and a price war between major oil producers. The United States Oil Fund, the market’s largest crude oil ETF by assets, for example, rolled out of May contracts into June in the week of April 7.

When ICBC and China Construction Bank settled their paper crude trading products April 14, the May crude contract already had a large discount compared with the June contract, but not as extreme as on April 20, market participants said.

Several traders and market participants told Caixin that some investors in the paper crude trading products were caught up in the price plunge because they tried to buy on the dip when crude prices dropped to $20 a barrel without considering that prices could sink further into negative territory.

Investors trade the Yuan You Bao products through margin deposit accounts at BoC, in which the investors deposit certain cash to conduct trading.

Contact reporters Timmy Shen (hongmingshen@caixin.com) and Denise Jia (huijuanjia@caixin.com), and editors Michael Bellart (michaelbellart@caixin.com) and Bob Simison (bobsimison@caixin.com)

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