Thursday’s collapse in oil prices brought with it big shifts to many of the indicators that analysts follow as they try to figure out where the market’s headed next.
Here are five charts monitoring many of those key barometers. In them, a trend emerges: capitulation.
1. Technical Tantrum
It started with a technical break. Then another. Then another. West Texas Intermediate crude broke through its 200-day moving average last week after a battle had raged between bulls and bears. Once that gave way, a key Fibonacci retracement and the low of the year were on the horizon, before paving the way to $45 a barrel. As each one collapsed, a new trap-door opened lower. “We have well and truly entered the capitulation stage,” said Saxo Bank head of commodity strategy Ole Hansen.
2. Overnight Panic
In Asian trading hours Friday, where volumes are normally small, a sudden surge came that sent U.S. crude prices crashing through the $45 a barrel level. “It was an extremely violent day yesterday and that continued overnight,” said Petromatrix GmbH analyst Olivier Jakob. “There was not a lot of strong support until $45 and prices just went towards that.” The number of contracts traded in a minute -- usually in the hundreds early in the trading day -- surged above 7,000 on WTI at 4:28am London time.
3. Like Bears to Honey
Hedge funds dived into long positions like never before earlier this year. They may have capitulated. Preliminary Nymex data show WTI open interest rose to a record 2.27 million contracts on Thursday, likely suggesting the addition of new bearish bets given Thursday’s price moves, according to UBS analyst Giovanni Staunovo. It could also be that some investors held onto their bullish bets, even as crude fell to its lowest level in five months, he said.
4. Options Frenzy
The equivalent of more than 520 million barrels of crude options changed hands Thursday, the third most ever. Investors rushed to acquire bearish $45 and $46 bets for June WTI, but the futures price was also roiled by Mexico’s state oil company -- known as Pemex -- deciding earlier this month to hedge some of its production in the options market. That forced some traders to sell futures to balance the risk, or gamma, from options contracts, forcing prices lower, according to Amrita Sen, chief oil market analyst at Energy Aspects. "Negative gamma from the large Pemex hedging and shale producer selling coupled with short positions from momentum traders have created violent moves lower and no one risks catching a falling knife," she said.
5. Back to Square One?
And all of that has left the market back where it started when OPEC and other nations agreed to cut production in November -- in a bearish structure. WTI for December 2017 fell to a lower price than the same contract for a year later Thursday. It was the lowest close for the spread, a key indicator of market strength, since the last OPEC meeting. “Positives are in short supply for beleaguered oil bulls,” said PVM Oil Associates analyst Stephen Brennock.
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