A growing list of bearish items piled onto the back of already weak crude markets and helped drive WTI below $85.00 and Brent below $90.00 for the first time in two years. The decline in prices during October to date has also featured dynamic range expansion and a significant increase in implied option volatility across the energy complex. Some of the key news and data drivers this week included:
- The IMF cut its economic growth forecasts again this week (the third time in 2014) and warned of lower growth in the eurozone, Japan and Brazil. Fresh eurozone economic data this week also showed German industrial production in August fell a seasonally adjusted 4.0%, its steepest decline in 5-1/2 years.
- The poor EU data overlaid renewed pushback from both Germany and France against ECB's President Mario Draghi's plan to boost eurozone liquidity by expanding the ECB balance sheet from €2 trillion to €3 trillion with asset-backed purchases. Europe and Japan are both struggling in their fight against deflation and the odds of further downgrades to global economic (and oil demand) growth seem imminent.
- Likewise, the growing divergence in monetary policy between the US, and Europe and Japan, suggests more upward pressure on the value of the US dollar and corresponding downward pressure on industrial commodities and energy prices. It is worth noting that the modest corrective pullback in the US Dollar Index midweek failed to provide any meaningful support to oil prices.
- There is a great deal of focus on OPEC, and expectations of OPEC production cuts, heading into the November 27th meeting in Vienna now that Brent prices are below $90.00/barrel. This week, however, the market still appears more concerned with the significant increase in September OPEC production estimates released late last week and news of Saudi price cuts to Asian customers. Iran has now cuts its contract prices in Asia to match the Saudi efforts at maintaining market share.
- PIRA, a leading oil industry consultancy, held its annual client conference in New York this week. In an interview with Reuters, PIRA head DR. Gary Ross suggested oil prices were headed lower, and may have to fall as low as $75.00, and into contango, to balance markets, even with OPEC production cuts. The conference was also reported to have focused on the poor global economic outlook, rising North American shale output and rapidly increasing OECD inventory levels.
- Chart and technical signals have also added to the bearish tone and momentum as well as the sense that crude is "damaged goods." Both Brent and WTI are making fresh two-year lows. It is also worth noting that there is not much cumulative chart activity between this week's lows and June 2012 lows at $77.28 basis CME WTI.
- Late in the week, selling pressure continued with reports indicating a new transactional variable in play. There were a significant number of margins calls that forced reductions in market exposure among some participants. There is also heightened sensitively to a potential increase in exchange minimum margins now that volatility has increased markedly over the past 4-6 weeks. Likewise, evidence of a growing number of credit-related resets on consumer hedges, now deeply underwater, was also part of the market mix late in the week.
To a large degree, the market has already "baked in" a great deal of negative data and news, ranging from the higher September OPEC production, November Saudi contract crude price cuts, increasingly poor eurozone economic data and the much-diminished choices now facing the ECB. Likewise, the macro impact of the strong uptrend in the US dollar versus both the euro and yen is well understood at this point.
The above-mentioned reports that some of fresh selling pressure late in the week was tied to margins calls, and bank credit resets, might too suggest we have already seen important short-term capitulation on the downside within October's very large trading range to date.
There is also likely to be some degree of increased caution among sellers heading into next Tuesday's release of the International Energy Agency's (NASDAQ:IEA) Oil market report and next month's key OPEC meeting in Vienna. That said, we are likely to remain in a sell-the-rally mode even if some of the downside momentum dissipates.
The information in this report is purely the opinion of the author, as of the date of this report, and does not represent a recommendation to buy or sell by the author or by Mobius Risk Group, LLC. Information and data have been obtained from sources considered reliable; however, Mobius Risk Group LLC does not guarantee that the information is accurate or complete.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.