Oil futures panic sell offs, plunging financial markets, quiet bulls
So the road to $100 per barrel of oil has taken a temporary detour.
A storm is brewing and oil markets are the first to feel the brunt of volatility.
Oil prices dipped on Monday amid cautious sentiment as a plunge in financial markets last week and dollar strength early this week underscored concerns that growth may be slowing, putting pressure on purchasing power especially in Asia’s emerging economies, according to CNBC.
As of Friday’s close, the Dow, S&P, and Nasdaq had dropped 6.7%, 8.8% and 10.9% in October, respectively.
Front-month Brent crude oil futures were on Monday trading down 39 cents, or 0.5%, at $77.23 a barrel andU.S. West Texas Intermediate (WTI) crude futures were at $67.31 a barrel, down 28 cents, or 0.4%.
Courtesy of CNBC
A look at the culprits
Hedge funds slashed their bullish wagers on U.S. crude in the latest week to the lowest level in more than a year, the U.S. Commodity Futures Trading Commission said on Friday.
The speculator group cut its combined futures and options position in New York and London by 42,644 contracts to 216,733 in the week to Oct. 23, the lowest level since September 2017.
According to OilPrice.com, in the case of crude oil, investors started to book profits when uncertainty developed over whether there would be a supply shortage.
Crude oil prices rallied over $13 per barrel from late August to early October on the thought that the sanctions against Iran, which start on November 4, would cause a global supply shortage.
As of October 3, some analysts were calling for $100 crude oil, but the arguments weakened after Saudi and Russia pledged to offset any shortfall in supply.
“This fueled the initial stages of the pullback, where systematic risk started to become a factor in the crude oil market on October 10 – 11 when concerns over rapidly rising U.S. Treasury yields fueled a steep drop in U.S. equity markets,” said OilPrice.com.
“But the real reason for the sell-off was the liquidation by the hedge funds. Government data showed the hedge funds were net long as we approached the October highs. Data since then shows the hedge funds have reduced their long positions and increased their short positions.”
OilPrice explains that what may have started as simple profit-taking because of a gradual change in the fundamentals regarding a potential oil shortage (unsystematic risk) blossomed into aggressive liquidation due to the unexpected stock market volatility (systematic risk).
Supply side risks
On the supply side, oil markets remain tense ahead of looming U.S. sanctions against Iran’s crude exports, which are set to start next week and are expected to tighten supply, especially to Asia which takes most of Iran’s shipments.
Ole Hansen, Head of Commodity Strategy at Saxo Bank said the focus in commodities has turned to the risk of an economic slowdown negatively impacting the demand outlook into 2019.
“As October began there was much talk about supply and the risk of surging oil prices before year-end given that US sanctions against Iran are scheduled to come into full force from November 5,” began Hansen.
“In early October when Brent crude oil broke above $80/barrel and surged to almost $87/b. As the price of oil rose so too did the risk to the outlook for demand, with many emerging market economies already being troubled by a heavy load of dollar debt at a time of rising funding costs and a stronger dollar.”
Three weeks later and following an 11% slump Brent crude has fallen back to support at $75/b. The pledge from Saudi Arabia to pump as hard as possible is going a long way to calm any worries about supply shortages over the coming months.
“As per our recently released Q4 Outlook, we believe the “lower growth leading to lower demand” narrative eventually will take its toll on crude oil prices. However, we also believe that the market may have jumped the gun too soon with the supply disruption impact from Iran not yet fully known,” said Hansen.
Reuters says that in North America, there is no oil shortage as U.S. crude oil production has increased by almost a third since mid-2016 to around 11 million barrels per day.
Production is set to rise further. U.S. drillers added two oil rigs in the week to Oct. 26, bringing the total count to 875, the highest level since March 2015.