Last week crude oil prices registered the largest weekly decline on record, down nearly $17 a barrel. The mainstream media attributed this to the death of bin Laden, but as I suggested last week in reality he had little to do with global oil prices. After all, why would he?
The oil market was ripe for a good old-fashioned cleansing, a classic wash out. Speculative wash-outs are not at all uncommon in the commodity markets. The excuse for crude oil prices was the killing of bin Laden. Actually last week we saw a relatively quiet Middle East (no new supply disruptions, but bottom line this most recent, most severe sell off really had to do with money.
The collapse began with a market call by Goldman Sachs to sell all commodities, and last week it was not only crude oil. Just about every commodity dropped – including agri commodities, gold, copper and silver. The increase in volatility caused a number of exchanges to raise margin requirements — on not just oil, but metals and a variety of other commodities.
This combination of declining prices with the higher cost of holding contracts resulted in a selling frenzy with selling creating more selling. Stops are hit, resulting in more selling and the margin calls swelling. It feeds on itself as too many folks try to exit the same door at the same time, and even the big boys can get caught in the fray. It was reported the world’s largest hedge fund lost $400 million in oil futures last week.
Bottom line, this was a technical sell off and did nothing to change the fundamentals of a tight supply/demand scenario for the global oil market. World demand is still slated to grow by 1.5 million barrels/day this year due in part to the 9.5% increase in Chinese GDP, Libyan production is still down by at least that much, and no new major supply sources are coming on stream anytime soon.
Plus, lower prices do nothing to curb demand — the reason I believe oil prices will not remain below $100/barrel much longer.
George Kleinman is President of the Lake Tahoe based commodity advisory and trading firm Commodity Resource. He trades oil (and other commodities) for himself and his clients. If you are interested in having George trade for you, email him for additional information. Email: firstname.lastname@example.org. Phone 800-233-4445.