“If it wasn’t for bad luck, I’d have no luck at all,” Walter Mosley wrote.
Today it was “If it wasn’t for bad news, there’s be no news at all” for the oil sector.
Oil prices got crushed today with U.S. benchmark West Texas Intermediate falling to close at $50.25 a barrel, down 5.44%, and the international Brent crude benchmark tumbling 4.95% to $53.15 a barrel. The drop in West Texas Intermediate to near $50 a barrel is certainly enough to get traders’ attention. A drop through that level opens the way to a price in the low $40s.
The plunge was a result of three pieces of news.
First, the U.S. Energy Information Agency reported that U.S. supplies rose 8.2 million barrels last week to the highest level since the beginning of weekly supply reports back in 1982.
Second, Saudi Arabia’s Oil Minister Khalid Al-Falih said that compliance with OPEC production cuts set in December after a great start has slowed. Russia and Iraq, for example, both now lag in their schedule to reduce production. The Saudi minister complained on Tuesday that global supplies have been slower to decline than OPEC had expected.
And, third, oil traders had built up a huge long position in West Texas Intermediate and Brent crude last week–a record 1 billion barrels in futures and options. This week they are selling at least part of that long position.
Oh, and the strength of the U.S. dollar hasn’t helped since a stronger dollar drives down the dollar-denominated price of oil.
I’d expect that oil prices will continue to trend lower as long as the dollar climbs and until traders finish selling their long positions–or decide that prices have fallen far enough to make a long trade attractive again. (I think that price would be somewhere in the mid-$40s.) Watch to see if West Texas Intermediate drops below $50 tomorrow, March 9, since that could release more selling.