Unprecedented period of uncertainty in oil markets
Oil prices tumbled more than 6 percent on Tuesday in heavy trading volume, with U.S. crude diving to its lowest level in more than a year, caught in a broader Wall Street selloff fed by mounting concerns about a slowdown in global economic growth.
Reuters reports in its article Oil slumps 6 percent as equities slide fuels demand worries that U.S. West Texas Intermediate (WTI) crude futures ended the session down $3.77, or 6.6 percent, at $53.43 per barrel. The contract fell as much as 7.7 percent during the session to touch $52.77 a barrel, the lowest since October 2017. More than 946,000 front-month WTI contracts changed hands, exceeding the daily average over the last 10 months and the second-highest daily volume since June, according to Refinitiv data. Brent crude futures fell $4.26, or 6.4 percent, to settle at $62.53 a barrel. The international benchmark fell as much as 7.6 percent to $61.71 during the session, the lowest since December 2017.
Oil’s slide has been largely unimpeded since early October when WTI prices were near four-year peaks. Since then, WTI has fallen more than 30 percent. “For the time being it’s more about risk,” said Jim Ritterbusch, president of Ritterbusch and Associates. “When the stock market comes off 8 or 9 percent, it tends to conjure up images of a weak global economy and that feeds into expectations of weaker-than-expected oil demand.”
Global stock markets have slumped in the past two months on worries about corporate earnings, rising borrowing costs, slowing global economic momentum and trade tensions.
Traders see further downside risk to oil prices from growing U.S. shale production and a deteriorating economic outlook. Macro-focused funds and commodity trading advisory (CTA) firms have pulled back positions in recent weeks as the selloff has accelerated, market participants said.
According to Credit Suisse, prior to oil’s selloff in early October, macro/discretionary funds and CTAs held a net long position that ranked in the top decile over the past five years. As of Monday, those funds were balanced between long and short positions as traders sold long positions and funds shifted to the sidelines. “This is a risk aversion trade,” said Mark Connors, global head of portfolio and risk advisory at Credit Suisse.
The Organization of the Petroleum Exporting Countries is pushing for a supply cut of 1 million bpd to 1.4 million bpd when it meets on Dec. 6.
The OPEC envoy for the United Arab Emirates said it was very likely that the group would reduce output but the exact level had yet to be decided.
The International Energy Agency (IEA) warned OPEC and other producers of the “negative implications” of supply cuts, with many analysts fearing a spike in crude prices could erode consumption.
“We are entering an unprecedented period of uncertainty in oil markets,” IEA Executive Director Fatih Birol said on Tuesday.