Oil Tantrum
When fears become reality. Oil prices are being driven lower by fear and that fear is becoming a self-fulfilling prophecy when we talk about economic growth. The International Energy Agency is warning us that the world will soon be drowning in oil. There is a record short position in hedge funds and we have the promise of more Iranian oil on the world market. Add it all up and it's causing the crude oil market to crater around the globe and is being driven by fear.
The shake out is being felt in consuming countries and producing countries as well. Even Japan has entered bear market territory. The International Monetary Fund lowered its growth forecast on slowing China fears even though China imported a record amount of oil last year. China’s GDP did miss expectations and the hoped for stimulus did not occur. This is the same group that warned Fed Chair Janet Yellen not to raise interest rates because the emerging markets might get shaky. If low oil prices are supposed to be a good thing, the global stock markets have not got the message.
It's not a temper tantrum we are getting but an oil tantrum. The weakness in oil is not being taken as a production story but a sinking demand story even though we have not seen any hard evidence in the actual demand numbers. It is fear that we will see demand slow in the future and based on the mood of the market, that fear may start to become a reality.
Saudi Arabia is getting hit not only by the sinking oil price but also because of the rising U.S. dollar. The Saudi riyal is pegged to the dollar and speculators have been betting that the Saudis will have to lift the peg. Overnight Saudi Arabia cracked down on those buying options betting on that move. The Saudi Arabian Monetary Agency told lenders to stop the sale of options contracts on riyal forwards. That move by the Saudis shows that this oil price collapse is taking its toll and they don’t want the market to force them to lift its peg to the dollar earlier than they may want to.
Iran that will try to regain the market share it lost to Saudi Arabia during the sanctions and the Saudis will be forced to compete. The market should have priced in Iranian oil but somehow they seem to be shocked.
On top of that the market is pricing in another increase in U.S. crude oil supply this week. The API will come out tonight and the expectations are that crude supply will rebound by 2.5 million barrels.
Yesterday AAA reported, “tumbling crude oil prices around the world have helped send the national retail average price for gasoline to its lowest mark since February 2009. Retail averages have fallen for 63 of the past 74 days, for a total savings of 34 cents per gallon, reaching s price of $1.88 per gallon."