Whatever the semblance of support was at $55 WTI, was sliced through like a hot knife through butter as a brutal combination of events continues to weigh on oil prices.
At the heart of the matter is the lack of market respect for OPEC rhetoric regarding deep production cuts that have been completely ignored as the market now questions if the projected reduction would be entirely sufficient to rebalance markets given the expected glut in Q1.
But mercilessly for the producer, the oil gusher came to a halt as, after a run of 6 consecutive weeks of builds, the American Petroleum Institute (API) reported a surprise crude oil inventory draw, while inventories in Cushing climbed at a much slower pace than expected.
But beyond the obvious OPEC machinations, the most brutal part of the sell-offs concurred with risk assets melting on the back of a global economic slowdown. That has now broadened to include the United States after the Federal Reserve Board raised concerns about a possible economic downturn in 2019. But let’s face it: China’s economic outlook remains weak with the US-China trade war looking more likely to freeze over than thaw at this stage.
On the position side of the equation, the buy only community is being dwarfed by the systematic fund types that continue to increase short positions. The COT has been a sharp indicator for future price movements and tough to ignore.
So, in the back of vigorous global supplies, a stronger USD weighing on prices slowing EM demand plus the flat-out denomination effect, along with Iran sanction waivers having put oil bulls in a world of pain, many are now left praying for harsh Northern Hemisphere winter to drive prices higher.
Global equities
Global equity futures were flashing red on tech sector concerns, but this is a macro train wreck unfolding in front of us. Trade war disarray post-APEC summit notwithstanding, with Federal Reserve Board suggesting Trump administration fiscal stimulus will fade in 2019, there was no place to go but down for equities. It’s no longer a de-synchronized global slowdown but rather an expanding global growth sinkhole.
Also, investors are deeply concerned that Technology could be the US administration’s new battleground which would make trade wars look like a game of axis and allies. The US administration is reportedly laying the groundwork for technology sector trade controls.
Currency markets
G-10 currency markets are looking decidedly risk-off as EURUSD dropped in fast order following on EURJPY heels. A nasty convergence of market agitators continue to weigh on technology stocks and has the rest of equities complex joining the melt. The dollar gained momentum across the board as haven appeal kicked in.
Gold market
While the strong USD dented gold appeal, there is more than enough risk aversion permeating every pocket of the markets to keep a bid under gold prices. The Feds are on a dovish tack which itself should offer good support for gold.