Speculators in charge as oil takes aim at new lows

Oil market speculators are in the driving seat as oil prices hover above their lowest levels since the financial crash.

Both North Sea Brent and West Texas Intermediate futures were facing a record number of net short positions – where speculators are counting on prices falling – as both benchmarks opened the week on another downbeat note.

In late afternoon trading UAE time, Brent futures were US$1.26 lower at $36.40 a barrel.

That was just above the lowest point of the financial crash in December 2008 when Brent fell sharply to $36.20, and only just above sustained levels not seen since 2004.

“There is no doubt that this bloodbath keeps getting worse,” said Ole Hansen, the head of commodity strategy at Copenhagen’s Saxo Bank.

The basic fundamentals driving the oil market are now well established – that the market will suffer pain until enough production has been forced off to allow refiners to sop up the huge glut – but the question remains how low oil prices can be pushed while those dynamics are working themselves out.

The uncertainty itself is a factor that is keeping the market volatile.

Steve Schwarzman, the head of Blackstone, an investment bank, caught the mood at a Goldman Sachs investors conference last week: “Virtually every energy expert who purports to be one is wrong almost all the time, [but one thing for sure is] there will be more pain in that area.”

Rather than proving to be a mixed blessing with benefits to consumers from low petrol prices, the severe plunge in oil prices – which is now approaching 70 per cent since summer last year – is having detrimental consequences for markets in general.

“We are starting to see the real negative impact of lower oil now,” says Mr Hansen.

“It’s not just about cheaper petrol prices but it also means that pensions are starting to suffer from lower dividends and emerging-market losses are affecting stocks and bonds; added to that is the impending US interest rate hike.”

There does not seem to be much evidence that demand for oil will accelerate enough to turn the market around quickly. China has maintained its level of crude oil imports but it appears to be turning that around in its refineries and re-exporting as petrol and other refined products because of weaker demand in the home market.

China has also been putting a large amount of oil in its newly built strategic reserves terminals but data on the new facilities are murky and it is hard to track the impact.

There is little to look for to halt the market’s slide apart from a deal in which Saudi Arabia would cut back output to accommodate likely new supply from Iran next year. But that is a remote prospect.

“It is fair to say that we are faced with a position right now where there is negative momentum and negative fundamentals. There are record short positions in Brent and WTI, and [the speculators] are happy to help the market along in the sell-off,” says Mr Hansen.


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