What is causing oil to slump?
“Another turbulent week in oil markets carried crude prices to their lowest point since January, with thin trading and a blurry outlook for supply and demand driving a fitful 30% decline from this year’s highs.
A 5.9% gain since Wednesday notwithstanding, the main U.S. oil benchmark has shed about $35 a barrel since peaking above $122 three months ago. West Texas Intermediate closed Friday at $86.79. Brent crude futures, the primary international price gauge, ended at $92.84.
Much like what happened on the way up early this year, the decline in prices has been intensified by heightened volatility and diminished liquidity in the futures markets, which are meant to ease the movement of barrels around the world.
Traders and analysts said that an overwhelming number of variables—from calculating how much consumption will be reduced by China’s Covid-19 lockdowns to handicapping how many of Russia’s shunned barrels will make it to market—has made it unusually difficult to anticipate the direction of prices.
Other examples of uncertainty looming over the market include how long the Biden administration will dip into the U.S. Strategic Petroleum Reserve to boost domestic supply, whether sky-high natural-gas prices in Europe will prompt utilities to burn oil instead, and to what degree the Organization of the Petroleum Exporting Countries and its market allies are willing to throttle back output to support prices.
A renewed nuclear deal between the U.S. and Iran could bring Iranian petroleum back to the market. Lately, fears of recession and reduced consumption have overshadowed concern about inadequate petroleum supplies and pushed prices lower.
BofA Securities analysts laid out cases in a recent note to clients for oil prices to both rise and fall by as much as $20 over the next few months. “There is simply too much uncertainty around fundamentals going into the winter,” they wrote.
The unpredictability has boosted volatility, which has sent traders to the sidelines. Open interest, a measure of trading activity, has lately been about half what it was five years ago in the most active U.S. oil futures contract and about 30% what it was last year.
The decline in trades has reduced liquidity—the ability to carry out transactions at expected prices without causing big moves in prices or disorderly trading—in markets that were already hampered by thin trading and prone to wild swings, traders said.”