We knew it was just a matter of time before something shook the trees, but unfortunately for a lot of oil traders, that came in the form of oil bears that gobbled up a large number of stops loss orders last night, sending oil cratering to the tune of nearly -6 % before prices recovered to close down around -0.8 %
While under a full head of steam from the FOMC communication showing concern over the pace of the economic recovery due to the virus, oil bears, at one stage overnight, made mincemeat out of the bulls in a highly uncorrelated sell-off that left many scratching their head.
Still, the sudden market sell-off provides a stark reminder of how sensitive oil markets are to lousy news around the virus. But from my seat, it more so illustrates the perils of trading a highly volatile asset class during the summer where sell-offs can get exaggerated when viewed through the lens of low liquidity summertime trading conditions.
Because of the uncorrelated nature of the move, the dips were quickly hovered up. Still, it doesn't diminish the fact the oil market recovery remains extremely uneven, where not even a colossal 10 million drawdown in US inventories could push the market higher, as this weeks inventory reports and the Fed commitment to maintaining interest rates near zero had but a fleeting positive effect on oil prices.
Maybe the Fed got it wrong, suggesting that the path of the economy depended on the way of the virus. For oil prices, I would recommend that the road to recovery depends significantly on the fear of the virus, as it looked like a lot of fear, rather than logic pushing the market lower overnight.
Oil is back trading within the well-worn ranges, with Brent around $43/bbl this morning, supported by the weaker US dollar. Still, uncertainty on the impact of the coronavirus pandemic and anticipation of OPEC+ production cuts easing in August will continue to be a dead weight fastened around the market's neck and should keep prices capped for now.
Barring any positive surprise on the virus (or vaccine development), one would expect the market to skew lower for the next few weeks, as oil traders weigh the cloudy demand outlook getting amplified by the loosening of supply/demand balances near-term, as some OPEC+ barrels return to the market.