The crash seen in the price of crude oil over the past few months has arguably been the biggest story of the year, with the market tumbling by more than a third since the start of October. There’s been further declines today as US benchmark WTI has dropped below last month’s low and you have to go back to September 2017 to find a time when the price was lower. The FTSE is also in the red on the day, with the benchmark falling by 30 points and trading not far from its recent lows.
What’s perhaps most interesting about the fall in the price of Oil is that not too much has really changed from a fundamental point of view that supports the large drop. Rather it appears to have been primarily caused by managed money making a dramatic U-turn after overestimating the chances of a supply side shock. Fears that Iranian sanctions reimposed by Washington would cause a drastic fall in output saw the market rally to its highest level in almost 4 years at the start of Q4, but these concerns now look badly misplaced and it seems that a lot of people were caught on the wrong side in looking for $100 a barrel crude once more. As it transpired, waivers have meant that less than 1m bpd of Iranian oil exports have been lost and this shortfall should be covered entirely by the newly agreed output cuts from OPEC+.
The cause of the latest push lower is reports that Russian production has hit its highest ever level this month, which raises concerns surrounding their intentions to follow through on their promises to cut output alongside OPEC members. The organisation often suffers from an intriguing aspect of game theory where all countries want to see production cut to support the oil price, but rarely does a country want to cut themselves for loss of revenues.
A strengthening US dollar in recent months has also played a role in the drop, but even when this is considered alongside the marked shift in positioning, from very bullish to bearish, amongst money managers, the declines don’t appear to be commensurate. There could well be another final flush lower ahead but given the fundamental backdrop a move back down to the 2016 lows beneath $30 a barrel seems highly unlikely.