Crude-oil prices were carving out fresh yearly lows early Friday, deepening carnage in a commodity that already has futures for the U.S. benchmark and the international contract in bear-market territory.
Global benchmark Brent oil
LCOF9, -5.88%
and WTI are in a bear market, usually defined as a drop of at least 20% from a recent peak.
Here are a few reasons that industry experts say are contributing to Friday’s tumble, which had West Texas Intermediate crude
US:CLZ8
on the brink of slipping below $50 a barrel, off by about 7%, and approaching the lowest settlement since October of 2017:
- . Holiday trading volume: Traders say that Friday’s decline can at least partly be attributed to thinner trading volumes following Thanksgiving, when commodity markets were closed. Lower trading activity can exacerbate moves in an asset, and with crude engulfed in a vicious downtrend, the tendency is lower. Moreover, the crude market will close an hour earlier at 1:30 p.m. Eastern.
- . Oversupply: U.S. oil production topped 11 million barrels a day earlier this year, according to the Energy Information Administration, sparking fears that supplies will overwhelm demand.
- . Margin calls: Traders say that Friday’s decline also has been intensified by margin calls from hedge funds and those speculating on the price of oil. A margin call occurs when a broker demands that a client that’s lost money making leveraged bets pony up additional money to meet a minimum maintenance margin. Margin calls can result in forced selling, amplifying upside and downside moves.
- . China demand: China’s demand for oil byproduct, gasoline, dropped to a the lowest level in 13 months, according to a Reuters report on Friday, offering further signs that the Beijing-Washington trade spat is hurting the world’s second-largest economy and one of the biggest importers of energy-related products.
- . Trump: President Donald Trump has consistently been advocating for lower oil prices and on Wednesday issued a tweet urging even lower prices and thanking the Saudis for recent declines.
- . Saudi Arabia in a corner: Market participants have said that the Saudi-orchestrated killing of journalist Jamal Khashoggi has complicated politics around oil. Trump is reluctant to sanction Riyadh because of a desire to keep fuel prices lower and preserve defense-sector deals. The oil-producing nation may feel compelled to comply with the U.S. president’s desire for lower crude prices.
Oil’s convulsion lower has unsettled investors and stoked further uncertainty about global economic health. Lingering worry about expansion outside of the U.S. is reflected in the S&P 500 index
SPX, -0.20%
the Dow Jones Industrial Average
DJIA, -0.27%
and the Nasdaq Composite Index
COMP, +0.03%
all headed for their worst Thanksgiving week in years.
“Concerns of slowing global demand and a possible slowdown for China,” have investors worried that oil is an ominous signal for global markets, Phil Flynn, senior market analyst at Price Futures Group told MarketWatch. “The bottom is really falling out of oil,” Flynn said.
Tariq Zahir, managing member of investment-advisory firm Tyche Capital Advisors, said he believed margin calls were adding to the downdraft for oil and speculated that the market could see a settlement below $50 a barrel. “I really think $50 is going to be broken,” he told MarketWatch.
Zahir also said Saudi Arabia, viewed as the most influential member of the Organization of the Petroleum Exporting Countries, wasn’t in a position to drive oil prices higher due to the politics around the killing of Khashoggi.
“I think the Saudis are really painted into a corner,” he said. OPEC will convene a key meeting on Dec. 6 that will be watched for the plan to address the dramatic unraveling in prices that has taken hold.
Market participants think the meeting can’t come soon enough.
Check out MarketWatch’s explanation for how oil pivoted from a 52-week high to a bear market.
Read: Here’s what U.S. waivers on Iran oil sanctions mean for the global crude market
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Source : MTV
