The plunge in crude oil markets this past week to a six-month low was is likely to have been driven by worries about Chinese economic growth, persistently high inventories and fund positioning.
Brent crude fell below US$50 on Thursday for the first time since late March but gained back some ground on Friday to close at $49.10. Its loss for the week amounted to 5 per cent.
Meanwhile the US benchmark, West Texas Intermediate, slumped to a low of $45.29 a barrel on Thursday, the lowest since November, when Opec agreed to curb production by 1.8 million barrels per day (bpd) for six months from January 1. It, too, bounced up on Friday, helped by assurances by Saudi Arabia that Russia is ready to join Opec in extending supply cuts to reduce a persistent glut. WTI’s Friday close of $46.22 left it with a loss for the week of 6.3 per cent.
The explanations go beyond the rise of US shale oil, experts said.
“People often reverse-engineer an explanation. But, I think the velocity of the move this week stems from China and its liquidity tightening. That spooked the market across all commodities,” said Michael Tran, the director of global energy strategy at RBC Capital Markets. “It’s a commodities story rather than oil-specific.”
Chinese manufacturing surveys this week triggered worries that the economic growth in the world’s second largest economy may have peaked in the first quarter and China’s central bank has moved to tighten credit leading to a fall in stock prices for the fourth straight week.
Doubts that the Opec-led supply cut of the past few months are deep enough to draw down bloated storage levels around the world are also weighing on prices. US crude stockpiles fell less than expected last week as rising US production offset reduced supply from Opec.
As a result, oil traders may have finally given up on an early rebalancing of inventories in the crude market by Opec.
One dominant group appeared to rush into the selling: managed futures firms, or commodity trading advisers (CTAs), which manage about $340 billion in assets, according to BarclayHedge, a fund research group in Fairfield, Iowa.
These funds advise others on buying or selling futures, futures options and foreign-exchange forward contracts. They often look at macro-economic trends across asset classes and trade dozens of markets using models to detect the start and end of moves.
For such companies, multiple signs of a trend change were clear this week: a nose-dive in Chinese iron ore futures, big losses in gold and copper prices and persistently high oil inventories that spooked crude oil traders.
Those fears appeared to be heightened by a note from JP Morgan analysts on Thursday, citing increasing risk that Saudi Arabia would reverse its cuts and pump more crude. JP Morgan did not respond to requests for comment.
Even though oil prices have weakened since mid-March, speculators have maintained long positions, putting them in danger of a reversal like Thursday’s sell-off.
“There are definitely some new shorts in the crude oil market. The systematic CTAs, the ones not trading fundamentals and purely technical, were definitely sellers,” said Nick Gentile, the managing partner of commodity trading adviser NickJen Capital in New York.
As prices continued to fall, liquidation of timespreads added to the move, according to a note from Goldman Sachs.
Hedge funds are also losing faith that Opec can accelerate the rebalancing of the oil market even if the group agrees to extend output cuts when it meets later this month.
The speed and direction of the selling this week was enough to cause the December 2017 crude contract price to fall below the December 2018 contract, an indication of increasing worries about the overhang of supply.
Volumes spiked on Thursday, with more than 940,000 front-month US crude contracts changing hands, compared with the daily average of 535,000 contracts.
“The obvious thing is that the market was massively long. When it’s a crowded trade, things tend to do the opposite very quickly,” said Mr Gentile.
* Reuters
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