This 7th-largest Brent crude oil crash in history may force the OPEC+ cartel (the global oil benchmark) to rethink its policies next week. The group is increasingly inclined toward a pause on its annual output increases.
This sell-off was exacerbated by the lack of liquidity on the U.S. holiday, breaches to several technical supports, and Wall Street banks’ rush to dump crude oil futures in order to safeguard themselves against options market positions.
This development seems to have spooked many oil market participants who had been encouraged by the low stock levels and increased demand.
“It was a lack of downside that had us continuing to think nothing bad could happen,” she said. “No one was thinking we could get a variant that we’re not familiar with and it could have meaningful impact.
The price drop capped a dramatic week for the oil market, which started when U.S. President Joe Biden challenged OPEC+ by tapping the country’s strategic petroleum reserve in an effort to bring gasoline prices down. All of the countries that joined the American effort were South Korea, India and Japan.
Analysts and oil traders differed on the question of whether the panic reaction to the news was excessive. Damien Courvalin, oil analyst at Goldman Sachs in New York, called the drop an “excessive repricing” and ventured OPEC+ will respond pausing its production increases by three months.
High gasoline retail prices prompted U.S. President Joe Biden to seek ways to ease the pressure on consumers, leading to Tuesday’s announcement that the U.S. will release 50 million barrels of crude from the Strategic Petroleum Reserve, with China, Japan, India, South Korea and the U.K. also set to tap inventories. Oil prices rose on the confirmation of the move, suggesting that traders either had priced in new supplies or were overwhelmed by the response.
OPEC+ previously warned that it might reconsider a possible output rise if others nations proceed with a reserve withdrawal. UBS Group AG stated Friday that OPEC+ may choose to halt its planned increase of 400,000 barrels per day or cut production.
OPEC+ aims to ditch Output Hike, as Oil Sinks onto Virus
“It’s a sign the market got carried away from itself and that we still remain very vulnerable to Covid-19,” said John Kilduff, founding partner at Again Capital LLC.Aside from the headline prices, crude traders also watched several other notable shifts in the market. WTI crude oil futures fell below their 200-day and 100 day moving averages. This is a sign of technical weakness. Brent saw an increase in its discount due to U.S.-based benchmarks, which reached the highest since May 2020.
The picture wasn’t much brighter in oil-product markets, the part of the oil complex most directly affected by end-user demand. As the oil market started to value in an economic rebound, diesel prices plunged in Asia.
“This is a huge overreaction in terms of the market,” Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd. said in a Bloomberg Television interview. “This is the market pricing in the worst possible scenarios.”
–With assistance from Alex Longley and Javier Blas.