Oil markets begin to slide as Great Unwinding resumes
on July 7, 2015

WTI Jul15Oil prices have fallen around $5/bbl, since my suggestion last week that a “New oil price fall was a matter of “when”, not “if”“.  It thus seems increasingly likely they are resuming their fall back towards $30/bbl, as we discussed in last week’s pH Report webinar.

Financial players clearly misread the market when they assumed earlier this year that prices would ‘inevitably’ move higher, and now we will all suffer for their mistake, as markets continue their Great Unwinding.

The funds first began to believe in higher prices after the SuperBowl coup back in January, when prices jumped 20% in 2 days.  This pushed prices up in very thin trading.  But financial players clearly didn’t understand this was just a very clever trading move, and instead decided that it marked the repeat of the Q1 2009 rally.  As the chart shows:

  • Prices then had bottomed below $40/bbl, but moved into recovery as central banks began stimulus efforts
  • Fortunes were made as prices moved up to $125/bbl, due to the scale of the liquidity provided
  • And clearly many players thought they saw a similar pattern developing in Q1 this year
  • As a result, they are storing oil in tanks all over the world, as well as in floating storage

But this is not 2009 all over again. Central banks are most unlikely to add another $35tn of stimulus to that already supplied. Instead, we are seeing the Great Unwinding of all this stimulus, as China heads in a New Normal direction, and the Eurozone countries start to realise Greece’s debt will never be repaid.

The fundamentals of supply/demand are, of course, of no interest to the commodity funds.  As discussed last week, they currently have $69bn to invest in the futures – and $69bn can buy a lot commodities such as oil at today’s lower prices

The result is that we now have record inventory levels in the US and Europe, plus near-record levels of floating storage.  Equally important for Asian markets is that China is probably close to ending its buying to build its strategic oil reserve to cover 100 days of demand.

Obviously prices will bounce around from day-to-day and week-to-week.  But barring geo-political upset,  it is very hard to see why they should not continue their fall, now they have begun to slide again.


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