Investing.com - The global rout in equities is continuing to punish oil bulls, so much so that many may even doubt the non-correlation between stocks and commodities exists.
Despite a slight gain on the day, crude futures in both New York and London fell as much as 3% on the week for their third-straight weekly loss. The last time oil saw such a bearish trend was between the final weeks of July to mid-August. From there, it took off into one of its most bullish periods for this year, hitting four-year highs, before the rally came to a sudden halt earlier this month.
In Friday's session, oil's rebound was limited by the weakness on Wall Street and global equity markets, which posted their longest losing streak in five years.
U.S. WTI settled up 26 cents at $67.58 per barrel, rebounding from a session low of $66.19. It fell 2.2% on the week.
U.K. Brent, the international benchmark for oil, was up 70 cents, or almost 1 %, at $77.59. For the week, it lost 2.8%.
In theory, oil and other commodities should rise when stock markets fall as these are supposed to be real assets with intrinsic value that are non-correlated to equities, providing diversified portfolios a hedge when stock valuations are down. In reality, commodities and equities have often moved together when there’s a flight from risk, with gold often being the exceptional safe haven of choice.
“Until the equity markets calm down and VAR is reduced … it’s my belief that the (oil) market remains in liquidation mode, “ Scott Shelton, broker at ICAP (LON:NXGN) in Durham, North Carolina, said, referring to the Valuation of Risk, a model used to calculate maximum daily risk in the trading of a commodity.
“VAR has exploded and has forced Commodity Trading Advisers and traders to reduce the popular positions in the market with Brent longs, Brent spreads and Short WTI/Brent Boxes all suffering because of it,” Shelton added. “I would think a CTA that has a diversified portfolio is also reducing length in oil as their risk had likely exploded and they need to reduce positions.”
Aside from the gloom lent by equities, traders said sentiment in oil was also being affected by mixed signals from Saudi Arabia and OPEC on whether production cuts would occur before the end of the year.
OPEC signaled on Thursday it may have to return to production cuts as global inventories begin climbing, a move that could further sour its relations with President Donald Trump. Trump has repeatedly lashed out at the producer group, accusing it of undersupplying the world in order to keep crude prices high.
Saudi OPEC governor Adeeb Al-Aama indicated in an interview with Reuters on Thursday that production cuts may happen before year-end. But Saudi Energy Minister Khalid al-Falih said earlier this week the the kingdom will pump as much crude as necessary to ensure minimum disruption to global supplies from U.S. sanctions on Iranian oil exports beginning Nov. 4.
Some traders saw the Saudi uncertainty as an indication of its dilemma: Cut production and save oil prices from falling further, or submit to Trump’s demands for higher output and let the market slump in the hope of escaping potential US sanctions over murder of the journalist Jamal Khashoggi.