Black Friday quickly turned red on the world oil market.
The day after Thanksgiving had tickets before – meaning fewer traders would be more volatile – but nothing like this year. The prospect of a new version of Covid’s Omicron, which is blocking the fight against the plague around the world, sold out early in the morning, which turned out to be a complete disaster.
In the end, investors were in a hurry to hide their short positions, analysts speculated, and next week’s OPEC + meeting was aired. West Texas Intermediate, the US benchmark oil price, fell 13 percent, its biggest drop since April 2020. Brent crude fell 12 percent.
Throughout the year, oil prices rose steadily, and economic life gradually recovered from the plague, with drivers in cars and passengers on planes. According to many experts, global demand is approaching pre-epidemic levels, exceeding 100 million barrels per day. A number of senior traders have warned that the price of $ 100 oil may be approaching as OPEC + tightens its supply.
However, news of a new version of Covid-19, which scientists fear could be more contagious than existing strains and less susceptible to the vaccine, has sent shockwaves through the market. Benchmark crude oil futures showed the biggest drop in a single day since the first days of the plague, showing just how vulnerable this recovery is.
“It was a crazy day in the market, reminiscent of last March,” said Craig Erlam, chief market analyst at Oanda Europe.
The initial downturn was due to a resurgence of widespread congestion and fears of a travel ban, but many technical factors, such as post-holiday anemia, exacerbated sales. The turmoil spread to every corner of the market, from European diesel sales, to the spread of time, to today’s relative oil prices, to tomorrow’s oil and transparent options markets.
“Factors such as the lack of technical support and the low liquidity environment after Thanksgiving intensified the fall in prices,” said Giovanni Staunovo, a commodity analyst at UBS Group AG.
It was already an unusual week on the market. On Tuesday, the United States and other top oil consumers said they would withdraw supplies from emergency supplies to cut energy growth costs. In response, the Saudi-led OPEC + cartel said it might cancel plans to increase production. The London-based Brent is above $ 80 a barrel.
But that was before Omicron.
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Asia-Europe trade fell steadily early Friday, with prices falling 5 percent in London as of mid-morning. But the real emotion came in US time.
The market fell further as oil futures surpassed key technical levels and US futures broke the 100- and 200-day moving averages. This gave many participants the advantage of computer-based trading of the algorithm on a day when they were away from the market.
Fawad Razakzada, an analyst at ThinkMarkets, said: “There is no doubt that sales were driven by algo-based trading as the main technical level was broken.”
Then the options market began. When prices fall sharply, banks sell futures contracts to protect themselves from put option losses. Banks often sell put to producers who want to protect themselves from the bear market. The so-called negative gamma loop for option traders was seen as a factor on Friday.
Ilya Buuchuev, a partner at Pentathlon Investments and former head of oil derivatives at Koch Supply and Trading, said: “Dealers have lowered hedges and they have to sell futures to hedge because they are shorter than usual.”
During the worst of the catastrophe, New York’s WTI futures fell 14 percent from Thanksgiving and London’s Brent fell more than 12 percent. Roughly, they both recovered a bit, but for London futures, it remains the seventh worst one-day decline in history.
What happens next depends on whether the hypothesis about the effects of Omicron is fulfilled.
Goldman Sachs Group Inc. said in a statement on Friday that the move, which saw demand for 4 million barrels over the next three months, was not close to the initial blockage, but was enough to put the market back in disarray. In any case, the Wall Street Bank said it was an exaggeration.
After the holiday, the US market is expected to fully recover and prices are expected to recover quickly as volumes return to normal, so the downturn is a buy opportunity. The long-term outlook remains stable.
“It’s a huge overreaction to the market,” Amrita Sen, a senior oil analyst at Energy Aspects Ltd, told Bloomberg TV. “That’s the market price of the worst-case scenarios.”