Equities Collapse, a Price Correction or a Statistical illusion!

Dr. Faisal Mrza

The worst equities collapse since the financial crisis and speculators short positions weigh down oil markets, and pushed down oil prices to a two-months-low. On the closing week of February 9, 2018,WTI slumped by $6.25/bbl and settled at $59.20/bbl. Brentslumped by $5.79/bbl and settled at $62.79/bbl (the steepest weekly drop in two years). Brent/WTI spread slightly widened from$3.13/bbl last week to $3.59/bblthis week!




Speculative activities have slowed down, whilst in the past two months when oil prices passed$60/bbl, speculators have built up record net-long positions on oil futures, that positioning creates ample opportunity for profit-taking in prices upward movement, but speculators now must cover those earlier positions while prices in downward movement (Price Correction).




The physical markets remain strong as Brent price structure is in backwardation, which illustrates strong demand, supplies tightening and inventory draws when the price of front month crude futures are higher.




The concern over unprecedented US output growth exacerbated market sentiment when hit a record of 10.25 million barrels per day, added a hypothetical concerns about global supplies rise. However, the enormous week-on-week jump in US output might be a statistical illusion! On an annual basis, US produced an average of8.9 million barrels a day in 2016, and produced 9.3 million barrels per day in 2017, which question the latest vast week-on-week jump in US crude oil output!




Oil markets still well supported by healthy global economic growth and a balanced outlook for 2018amid supply curbs and a firmer oil demand growth, facilitating the continuation of fall in oil inventories towards OPEC's recent five-year average target. However, some bearish horizon started to weigh on market sentiment, despite the earlier bullish factors:








* US oil-rig count close to a 33-month high.




* The seasonal weakness in gasoline demand.




* Refinery maintenance creates a seasonal crude oil build that helped the seasonal drop in crude runs.




* The re-start of Brent Forties crude pipeline, which is carrying about40% of total North Sea production.






Dr. Faisal Mrza

Energy and Oil Marketing Adviser

(Former OPEC / Saudi Aramco)

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