Oil prices continue their way down to new major lows. Since the beginning of 2016, they have lost 15% more to come close to $30 per barrel. 18 months ago, nobody could have thought of such prices. They were considered unreal since crude oil cost over $100/b.
Experts say that apart from bearish fundamentals like excessive and sill growing oversupply, which won’t go away in 2016, there are technical factors pressing oil prices, including speculative factors and a strong dollar.
Morgan Stanley experts say that the fundamentals have already been prices into the market, which means that the U.S. Dollar and the Fed’s interest rate hikes are going to be some of the key factors affecting crude oil in 2016. That’s why they don’t deny a move all the way down to $20-$15 per barrel. The market bias is clearly bearish. Take the recent NYMEX stats as an example. On January 11, the amount of out option on WTI oil (which can be executed in late 2016 at $20/b) increased by 333 relative to January 8, thereby reaching 3101 contract or 3.1 million barrels. During the trading week, the given volume increased by 435 000 barrels. The holders of those options will benefit if the price goes below $20/b throughout the year.
At the same time, traders opened 689 trades (689 000 barrels) with the strike price of $15/b. These are still minor figures but they keep on growing every day. As for similar put options for Brent oil with strike $20/b and expiration in December 2016, there amount has already increased by 700% since the beginning of 2016!
There is another indicator – the amount of short trades on NYMEX and ICE – which is at this record high level today. Another interesting thing to pay attention to is the fact that the short trades opened by hedge funds throughout 2015 were in correlation with oil prices all that time. For instance, WTI oil traded mostly within the $40-$60 range, which included several cycles coinciding with the periods when the hedge funds reduced their exposure by closing the short speculative trades. Respectively, the new trend associated with building up new short trades and going on since October 2015 coincides with a new cycle of the long-term downtrend in the oil market.
As you probably know, that the strengthening American currency is one of the key factors why oil prices resumed their way down to new lows. The thing is that oil and USD are negatively correlated since oil is traded in dollars. On top of that, the Fed’s recent interest rate hike made dollar assets stronger, including the U.S. Dollar itself, thereby exerting more pressure on commodities and currencies. The Fed is expected to implement a few more hikes this year provided that the U.S. economy and labor market feel relatively healthy. If that’s the case, oil is going to feel even more pressure.
