Last week was supposed to be “capitulation” for crude, but it looks like there was still some capitulating to be done, because on Tuesday, WTI fell to its lowest since October 2017.
This is truly remarkable. On the one-week anniversary of the largest one-day decline for WTI since September 2015, U.S. crude dumped another 6%+, meaning we’ve just witnessed the two worst days for oil in three years in the space of just five trading days.
(Bloomberg)
Clearly, global growth concerns are at play here and it’s obviously not a coincidence that crude fell with equities. It’s the same old story on the fundamental front: A U.S. supply glut, jitters about demand in light of economic activity rolling over and, importantly, OPEC+ getting duped into overproducing ahead of the Iran sanctions only to see Trump grant waivers to eight nations.
In addition to that, it feels like we’re seeing a repeat of last Tuesday. “WTI [is] now getting the capitulatory rinse treatment”, Nomura’s Charlie McElligott wrote on Tuesday, adding that the bank’s CTA model shows -13% Short and goes to Max Short under 53.93.
One can’t help but be reminded of what Goldman said last week about dealers being forced to sell oil to stay hedged on the puts they sold to producers.
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“The large concentration of open interest in put positions at the $50/bbl, $55/bbl, and $60/bbl strikes suggests that price volatility will remain extremely high while WTI prices remain in the $50-$60/bbl range as the need to adjust delta-hedges will cause the market to move away from the prices at which put open interest is concentrated, creating significant near-term volatility”, the bank wrote, referencing the chart in the right pane below.
(Goldman)
Well, we’re getting more “significant near-term volatility”. The 14-day RSI is back to 15 after falling to record oversold levels during last week’s plunge.
(Bloomberg)
When trying to divine something about global growth from watching crude prices, you need to ask yourself whether the tail is wagging the dog. Let’s say you’re looking at 10Y breakevens, for instance, to try and read the tea leaves on growth expectations. Have a look at the following chart and tell me what’s leading what:
(Bloomberg)
Carts/horses, chickens/eggs.
Whatever the case, this is just another day where something “snapped”, as it were.
As far as crude goes, it’s going to be left to OPEC+ to try and figure out a way to turn this thing around early next month before the bottom falls out completely.
Notably, Trump’s Tuesday announcement that the White House is going to stick by Crown Prince Mohammed irrespective of whether he was behind the Khashoggi killing is likely to further endear the President to Riyadh, which may make the Kingdom think twice before agreeing to significant production cuts.
Paper oil is debilitating physical oil just like paper gold has decapitated physical gold for some time.