Oil prices extended their slump on Tuesday as West Texas Intermediate crude futures fell below $96 a barrel to its lowest level this month.
Prices have now nearly retreated to prewar levels, as bullish traders have cashed in on bets they made before the run-up and new money is reluctant to buy in.
Oil stocks were falling hard, with Chevron (ticker: CVX) down 5.6% and Exxon Mobil (XOM) down 6%, on pace for their steepest declines since June 2020. The Energy Select Sector SPDR exchange-traded fund (XLE) was down 4.5%.
U.S. oil settled at $109 a barrel Friday, but it has already fallen more than 10% this week. It reached nearly $125 last week. Brent crude futures, the international benchmark, also dropped more than 6% Tuesday, to $99.60 a barrel, having topped $130 at one point last week.
The selloff comes amid hopes over cease-fire talks between Russia and Ukraine and as China imposed lockdown restrictions on major manufacturing regions and millions of people, potentially weakening demand for oil.
“The prospect of a diplomatic solution toward Russia’s military aggression against Ukraine would help ease the world’s energy supply shock that has sent commodities soaring,” Interactive Investor’s head of investment Victoria Scholar says.
“Meanwhile on the demand side for oil, fears about an aggressive policy response from Beijing to China’s Covid outbreak has raised the prospect of a much weaker demand for oil from the world’s second-largest economy,” she adds.
Technical factors are also clearly at play. Traders had come into March holding aggressive long bets on oil that would pay off at futures prices above $100. There is evidence that many of them sold out of positions when oil spiked. Open interest in oil futures is now at the lowest level in six years, according to Bloomberg.
An oil market momentum indicator known as the Relative Strength Index, which measures price changes, has fallen to the mid-40s from highs above 80. Generally, a reading above 70 indicates that an asset is overbought.
“When you get up to 80, it’s implying that the last bull is in the market,” Robert Yawger, director of energy futures at Mizuho Securities, tells Barron’s. “It was way extended to the upside.”
Trading in other products was even more extended, with heating oil’s Relative Strength Index above 90 last week, Yawger says. “I’ve been doing this for 30 years plus, and I can count on one hand the amount of times I’ve seen something above 90.”
Yawger says it is clear that smaller investors who had been buying oil above $100 saw the reversal and moved to “bail fast.”
“There are some fundamental reasons here, there’s geopolitical reasons here, but positioning is also having a big say in where this market is going,” he says.
BDSwiss head of investment research, Marshall Gittler, notes that oil prices weren’t that far off their levels a month ago, before Russia’s invasion began.
“OPEC and others have been pointing out that at the moment there is no shortage of oil, just the fear of a shortage of oil in the future,” he says. “The price of oil further out in the future isn’t that different than it was a month ago.”
Absent a change in the Ukraine conflict, the next important indicator will be Wednesday’s Energy Information Administration’s weekly oil update, which will have information on U.S. oil supply and demand.