Not a lot going on this morning, except for the small matter of a bloodbath of epic proportions across global markets. After US equity markets got crushed on Friday, the ever-volatile Chinese equity market has not disappointed overnight, getting ab-sol-ute-ly walloped, dropping 8.5% in its daily biggest sell-off since 2007. Regardless of where you want to pin the blame – Chinese economic fears, US interest rate hike worries, or global commodity concerns – risk appetite, along with Elvis, has left the building.
Part of a vicious circle, the rout continues through Europe this morning and across the pond back to the US again; equity markets and commodity markets alike are getting clobbered, as fear feeds upon itself, and selling spurs on further selling. Brent has broken $45, WTI has dropped well into the $30s, and risk aversion is the theme of the day.
Over the weekend, Iran’s Oil Minister, Bijan Zanganeh, has only served to underscore the severe disparities and dislocations in the current global oil market, stating Iran will ‘be raising our oil production at any cost‘ as and when sanctions are lifted. At the same turn he said that Iran endorsed an emergency OPEC meeting to address sliding prices, but that OPEC should make room for Iran’s production once sanctions are lifted. Hum dee dum. Related: Wind Energy Could Blow U.S. Coal Industry Away
Global markets seem to suddenly be aware of the chasmic gap between equities and commodities, and are even more fearful as to where they could reconnect. We highlighted a similar chart to the one below just a few weeks ago. A reacquainting of the two could mean equities dropping by 50% according to the below chart:
In terms of crude, hedge funds have reduced their net-long position in WTI crude to a five-year low last week, while short positions have also increased significantly, getting close to the extreme short positions seen earlier in the year.
Meanwhile, the below chart illustrates how global inventory increases in the past year have helped to pressure oil prices lower. Total global liquids inventories are estimated to have grown by 2.3 million barrels per day through the first seven months of 2015, the highest level of builds since 1998. Related: The Precarious Life Of Energy Engineers In The United States
As the outage at the Whiting refinery persists, Chicago retail gasoline prices remain elevated, but edging lower from their recent highs. Retail gasoline on the national average should now be returning to its seasonal trend of moving lower.
The graphic below helps to provide a holistic view of gasoline prices across the US. While some states are receiving a good amount of the pass-through from lower oil prices, recent refinery issues have held gasoline prices considerably higher than they should otherwise be in places such as Los Angeles and Chicago:
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(Click to enlarge)
By Matt Smith
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It is clearly not about Iran wanting to flood the market with oil, although they probably are prepared to do so -- what they are trying to do is position themselves for a larger "market" share of OPEC production and make it clear to Saudi Arabia that those OPEC targets have to be cut in total to lift price. Waiting for shale to falter isn't going to come soon enough, or be enough.