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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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Oil Prices Ravaged By Financial Turmoil

oil trader

Oil prices fell back suddenly over the last few trading sessions, dragged down by some forces beyond the oil market.

The steady decline of the U.S. dollar has helped drive up crude prices for weeks, but that came to an abrupt halt last week. A rebound for the greenback led to a steep decline in oil prices on Friday.

At the same time, sudden turmoil in the broader financial system also bled over into the oil market. Volatility in the stock market flared up on Friday, sparking the sharpest single-day upheaval in years.

The Dow Jones Industrial Average fell more than 600 points, only the ninth time in history that a fall of that magnitude has occurred. “The stock market and interest rates can really affect oil a lot,” Mark Waggoner, president of Excel Futures, told The Wall Street Journal. “It’s spilling over into the energy markets and causing these ripple effects.”

The stronger-than-expected job growth and wage increases fueled speculation that the Fed would tighten interest rates more than previously thought. Bond yields continue to rise, undercutting equities. Signs of higher inflation also led to speculation of interest rate hikes from the central bank. The dollar gained 0.7 percent on Friday.

That led to a selloff for Brent and WTI. And if the turmoil continues, the trouble for oil benchmarks will also linger. “The potential is present for a big move lower should fear return to the stock market and spark liquidations across the board,” analysts at TAC Energy said Friday, according to The Wall Street Journal. “The cross-asset class correlations have returned over the past several weeks.” Related: Will Rising Crude Inventories End The Rally?

The problem for oil is that both oil prices and broader stock indices are seen as overvalued by some analysts. Hedge funds and other money managers have piled into bullish bets on crude, leaving positioning in the futures market overextended.

“The price slide is due to a general worsening of sentiment. Stock markets around the world are under pressure, which confirms that the steep price rise in the preceding weeks was for the most part sentiment-driven,” Commerzbank wrote in a note. “There is only limited fundamental justification for the high price level … It is therefore conceivable that the correction in oil prices will continue.”

An unraveling of positions from major investors could expose WTI and Brent to sudden losses. That correction tends to occur when a spate of news goes against existing sentiment. The broader financial system is finally facing some questions after a remarkable bull run, which is magnifying the danger for crude benchmark prices.

“A global selloff in risk assets is gathering pace and sending the energy complex lower amid a sea of red,” PVM Oil Associates Ltd. analysts Tamas Varga and Stephen Brennock wrote in a report. “The risk-off environment throughout the energy complex comes as U.S. drillers added oil rigs for a second consecutive week.” Related: How Globalization Will Create An Energy Crisis

“You’re starting to see a whiff of what I call the GMO trade — get me out,” Bill O’Grady, chief market strategist at Confluence Investment Management, told The Wall Street Journal.

It isn’t all sentiment trading, however. We now have several catalysts that could provoke a liquidation of bullish bets: inventories rose last week for the first time in months, the rig count continues to rise and U.S. production is breaking records. Seasonally, oil demand is at a lull, pushing up inventories. These trends were expected, but still present downside risk to what is looking like an overvalued oil price.

Perhaps most importantly, supply growth from the Permian looms large over oil prices. Ed Morse, global head of commodities research at Citigroup, told The Wall Street Journal that U.S. shale could wreck the oil market once again. He argues that the industry is ramping up production, and that assurances over a more cautious drilling approach from shale executives should not be trusted. As production increases continue unabated, oil prices could collapse again. “2018 could turn out to look a lot like 2014 — a year that started with very high prices and ended at very low prices,” he said.

By Nick Cunningham of Oilprice.com

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  • Paul on February 05 2018 said:
    Fake news has no Velcro brother Nick!
    The Dow fell near 1500 pesetas before my screen frosted over and then boom up 400 from the low, all in 360 seconds, sweet Jesus this is getting good!

    US stocks decline for different reasons over two day period and yet the pattern remains the same? But wait, if stocks went down cuz interest rates went up on Friday, why did stocks drop today as bond prices rallied? Hmm, guess its not interest rates causing all the wild action so what could it be, hmm.

    We know, most don't, brace yourself.

    Like any hurricane, water is drawn from all around. The 2016 bottom in oil prices coincided with the bottom of a global bear market and now at a cyclical top, we find the same hitching at the belt so what is the problem? The likelihood of an oil price decline that matches the pattern in the wake of 2014-2016 is 0.000001.

    Oil price will resume to higher levels after market correction ends in a kerfuffle between truth and deception.

    Boy is this is going to be great; see you at $2150 on the SP500 and don't blink - you might miss the buy of the century!
  • Citizen Oil on February 05 2018 said:
    Boy what a difference a couple of days make. These analyst geniuses being reactive again on daily noise. A week ago they were saying $ 80- $ 100 Bbl was a possibility by June. The stock market is not diving because of bad fundamentals, just the opposite. An excellent economy causing inflation and raising the 10 yr and 30 yr treasury rates. Relax people, it's going to be OK.
  • Mamdouh G Salameh on February 06 2018 said:
    The global oil market and oil prices need certainty. The current financial turmoil creates hesitation and doubts as to whether the turmoil is a passing phase or an indication of a coming bubble in the US financial market adversely affecting the global economy exactly as it did in 2008.

    Still the oil market fundamental underpinning the current surge in oil prices are sound. Moreover, any fluctuations in the value of the dollar upward or downward exert downward pressure on oil prices but this will be short-lived and limited particularly if faced by sound oil fundamentals as the case is now.

    2018 could not turn out to look like 2014 since oil prices were then double the current prices.

    One has to take an attitude of wait and see. But I am of the opinion that the current turmoil in the financial markets will soon subside allowing oil prices to resume their surge.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • John Brown on February 06 2018 said:
    If oil prices crash again, it will be the fault of OPEC/RUSSIA. Despite a glut of oil on the market OPEC/Russia idled millions of BPD to balance the market, or eliminate the glut. They did manage to reduce the glut but not eliminate it. They managed, with the help of many others, to manipulate the price over $50 a barrel, when based on supply and demand there was no reason oil should be over $40. However, $50 to $55 was probably a sweet spot. It let everybody make money, including the US shale oil industry, but wasn't so wild a number as to create a Gold/OIL rush of production.
    Of course GREED raised its ugly head. OPEC/RUSSIA loved oil at $55 while idling output, so a little more manipulation and they managed to push the price to $60. Everybody gets a percentage, not just in the oil industry, but those speculating, and the banks with big loans, so of course the higher the price the more the net profit on the percentage.
    So ...greed kicked in again, and the manipulation of WTI to over $65 didn't take much at all and Brent to over $70. Of course greed is never satisfied so now you have speculators coming in saying later in the year oil will be over $80 maybe $85. Really nifty numbers given their is still a glut of oil out there, and U.S. production has been jump started with prices over $60 and $65 for WTI. So now the USA is on a tear. Production has exceeded $10 million barrels a day and is set to grow exponentially with so much money to be made.
    So it will be interesting to see how OPEC/Russia, and the banks, and the markets handle the situation of growing supply/glut caused by their greed?
  • Timmie Tee on February 06 2018 said:
    Oil fundamentals are still intact— rebalancing inventory, +1.5mbpd y/y demand, and higher gasoline draws.... When the VIX falls back below 20, and the broader markets stabilize, look for another move to $70-75 WTI by this summer. There’s no way shale can continue growth in a rising interest rate environment, cheap loans for frack plays are over.

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