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Create AccountOil Bulls Ravaged as Crude Sinks!
15 November 2018
It’s been a savage few months for oil bulls, with the price of West Texas Crude (WTI) falling from approximately USD $76 per barrel to USD $56 per barrel in barely a month.
That's a fall of over 25% – an extraordinary move which can be seen clearly in the chart below, which plots the price of WTI crude over the last year.
Prices, which at one point were up over 25% for the year are now on track to fall for the year, should current prices hold through to end December 2018, with the price fall particularly severe this week, including a 7% daily drop that represented the largest 24 hour decline in over three years.
Part of the reason for the fall was no doubt a warning from OPEC on the demand side outlook for oil, with forecast demand dropping by 70,000 barrels per day, driven by weakness in emerging markets.
Strength in the USD, which has hurt the majority of the commodity complex, is also a factor.
Oil bulls, who’ve been savaged in the last month, may find some comfort in charts like the one below, which show that it’s still holding important support lines, but that is no guarantee that we won’t see prices head lower.
Analysts are rightly pointing out that the market is at a critical juncture here, and that, should oil fail to hold current levels, prices may well decline all the way to USD $52 per barrel, whilst a worst case scenario could see WTI fall all the way to USD $42 a barrel.
For an interesting take on what has driven the move in oil over the past month, we wanted to share the following blog from Kevin Muir, who blogs at the Macro Tourist, someone we consider a must follow on Twitter (@kevinmuir).
In essence, whilst Kevin acknowledges that a global growth slowdown, strength in the USD, and question marks about whether the Saudis really will cut oil production are all factors, he thinks they are a sideshow, and the main cause of this volatility is that there is “a behemoth out there that was long crude oil against short natural gas”.
As Kevin points out, anyone who has been short natural gas and long oil would have done fantastically well up until a month ago, as oil prices were soaring, whilst natural gas was in a funk.
As is often the case though, these trades are pushed too far, or in Kevin’s words, they become the Hotel California (i.e. you can never leave), and that the move in the last week in particular is a desperate hedge fund dumping their positions.
The final observations on this subject are also worth noting, with Kevin noting that: “know there will be all sorts of attempts to explain the markets through fundamental reasoning. Ignore them. Someone big just hit the puke-point for unwinding their long crude oil short nat gas (and nat gas spreads) position. It’s as simple as that. That’s why we are hitting record number of down days in a row. And it will only end when they are finished selling their crude and buying back their nat gas. When the snapback comes, it will be vicious.”
If that proves correct, and oil prices do stabilise before charging higher again, then we’d expect that to be supportive for precious metal prices.
Jordan Eliseo
Chief Economist
ABC Bullion
Disclaimer
This publication is for educational purposes only and should not be considered either general or personal advice. It does not consider any particular person’s investment objectives, financial situation or needs. Accordingly, no recommendation (expressed or implied) or other information contained in this report should be acted upon without the appropriateness of that information having regard to those factors. You should assess whether or not the information contained herein is appropriate to your individual financial circumstances and goals before making an investment decision, or seek the help the of a licensed financial adviser. Performance is historical, performance may vary, and past performance is not necessarily indicative of future performance. Any prices, quotes, or statistics included have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness.
That's a fall of over 25% – an extraordinary move which can be seen clearly in the chart below, which plots the price of WTI crude over the last year.
Prices, which at one point were up over 25% for the year are now on track to fall for the year, should current prices hold through to end December 2018, with the price fall particularly severe this week, including a 7% daily drop that represented the largest 24 hour decline in over three years.
Part of the reason for the fall was no doubt a warning from OPEC on the demand side outlook for oil, with forecast demand dropping by 70,000 barrels per day, driven by weakness in emerging markets.
Strength in the USD, which has hurt the majority of the commodity complex, is also a factor.
Oil bulls, who’ve been savaged in the last month, may find some comfort in charts like the one below, which show that it’s still holding important support lines, but that is no guarantee that we won’t see prices head lower.
Analysts are rightly pointing out that the market is at a critical juncture here, and that, should oil fail to hold current levels, prices may well decline all the way to USD $52 per barrel, whilst a worst case scenario could see WTI fall all the way to USD $42 a barrel.
For an interesting take on what has driven the move in oil over the past month, we wanted to share the following blog from Kevin Muir, who blogs at the Macro Tourist, someone we consider a must follow on Twitter (@kevinmuir).
In essence, whilst Kevin acknowledges that a global growth slowdown, strength in the USD, and question marks about whether the Saudis really will cut oil production are all factors, he thinks they are a sideshow, and the main cause of this volatility is that there is “a behemoth out there that was long crude oil against short natural gas”.
As Kevin points out, anyone who has been short natural gas and long oil would have done fantastically well up until a month ago, as oil prices were soaring, whilst natural gas was in a funk.
As is often the case though, these trades are pushed too far, or in Kevin’s words, they become the Hotel California (i.e. you can never leave), and that the move in the last week in particular is a desperate hedge fund dumping their positions.
The final observations on this subject are also worth noting, with Kevin noting that: “know there will be all sorts of attempts to explain the markets through fundamental reasoning. Ignore them. Someone big just hit the puke-point for unwinding their long crude oil short nat gas (and nat gas spreads) position. It’s as simple as that. That’s why we are hitting record number of down days in a row. And it will only end when they are finished selling their crude and buying back their nat gas. When the snapback comes, it will be vicious.”
If that proves correct, and oil prices do stabilise before charging higher again, then we’d expect that to be supportive for precious metal prices.
Jordan Eliseo
Chief Economist
ABC Bullion
Disclaimer
This publication is for educational purposes only and should not be considered either general or personal advice. It does not consider any particular person’s investment objectives, financial situation or needs. Accordingly, no recommendation (expressed or implied) or other information contained in this report should be acted upon without the appropriateness of that information having regard to those factors. You should assess whether or not the information contained herein is appropriate to your individual financial circumstances and goals before making an investment decision, or seek the help the of a licensed financial adviser. Performance is historical, performance may vary, and past performance is not necessarily indicative of future performance. Any prices, quotes, or statistics included have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness.
