Oil Crashes Into Bear Market: “It’s A Game Of Chicken”

If you were still bullish on crude going into Tuesday, then God bless you because oil just crashed into a bear market for the first time since last August.

Mercifully, the API data wasn’t a debacle although we’ll still need to get confirmation on Wednesday from the EIA numbers.

Here’s the API data:

• Crude inventories -2.72m bbl
• Cushing -1.26m bbl
• Gasoline +346k bbl
• Distillates +1.84m bbl

The median estimate for the EIA number is a 1.2m bbl draw (and a 500k Gasoline build), so against that, the API number looks bullish.

What doesn’t look bullish is this:

“Obviously, the sentiment in the market right now is negative and bearish,” Michael Loewen, a commodities strategist at Scotiabank in Toronto, told Bloomberg over the phone, adding that “OPEC has all of these barrels off the market right now, but what happens in 2Q when OPEC is expected to either lift or extend supply caps – There’s lots of concern around that.”

Yes, “a lot of concern about that.” And really, a “lot of concern” about everything including Libya producing the most oil in four years…

… more supply in floating storage…

… and questions about what the GCC-Qatar spat portends for the future of the production cuts.

“People are getting a little fatigued waiting for the production cuts to have effect,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Mass. “Between the U.S. shale activity and Libya and Nigeria seeing their production go up some, that’s making people very nervous about the near-term prospects.”

This should probably make anyone still long HY “very nervous about the near-term prospects” as well, given junk’s demonstrable propensity to become highly correlated with crude when things get messy.

HY issuance put the brakes on last week with just five deals pricing for $2.04 billion. That would be the slowest week since mid-February and you can bet that’s a consequence of falling crude prices. Yields on HY energy have hit a 7-month high, and MTD returns are -1.5%.

Meanwhile, as Citi wrote on Tuesday, “money managers have been net sellers of Brent and WTI to the order of ~445-mln bbls since net positioning reached a record high in late February, with fresh shorts accounting for ~200-m bbls and liquidation of long positions accounting for ~245-m bbls” (note: the bank thinks you shouldn’t read too much into that, but you know, the numbers are the numbers):

Here’s the bottom line from John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund:

The market’s in a game of chicken with OPEC and with Saudi Arabia in particular [and] unless and until they respond, we’re going to continue to grind lower.