Oil prices are off 25 percent from their four-year highs reached in early October, after the massive sell-off that began later that month which dragged crude oil squarely into bear market territory in November, completely wiping out this year’s gains.
On Tuesday, prices continued to fall sharply, with WTI reaching $53.34 by at 4.55pm EST, and Brent crude falling 6.65% on the day to $62.35. Both benchmarks are now trading at multi-month lows due to high crude stockpiles and disappointing results from the sanctions against Iran that most suspected would result in a tightening of supply.
The price slide that began early last week saw oil prices record their steepest one-day plunge in three years. Prices recovered somewhat in the latter half of last week, only to spiral downward again this week as concerns about oversupply persist.
Despite today’s sharp downward trend, some analysts think that prices are set to regain ground over the next month, based on the trends from past such oil price slumps. Others think that oil prices will need a major catalyst to rebound from current levels. This major catalyst could be the OPEC/non-OPEC meeting on December 6-7, at which the cartel and allies may announce a fresh production cut to stop the price decline, stabilize markets, and erase fears of looming oversupply threatening to sink prices again.
If history repeats itself, oil prices and the S&P 500 are both set to rebound in the month following the plunge, according to investment bank Jefferies.
“Severe one month declines in the price of oil has not presaged market weakness, quite the contrary, actually,” Jefferies said in a research note, as carried by CNBC.
Jefferies analyzed how oil prices and the S&P 500 index have reacted after a plunge in the price of oil similar to the one of the past few weeks and after oil slipped below two standard deviations thresholds. The investment bank found that since 1990—excluding the abnormal market behavior during the global financial crisis—WTI Crude typically gains 5.5 percent over the following month and rises 7.3 percent in the following three months after a plunge.
The S&P 500, for its part, generally goes up 2.3 percent over a month and gains 5.4 percent in the three months following a similar slump, according to Jefferies.
In the week ending November 13, hedge fund managers cut their net long position—the difference between bullish and bearish bets—in WTI Crude to the lowest since August 2017 and cut their net long position in Brent Crude to the lowest in a year and a half, according to data from exchanges and the U.S. Commodity Futures Trading Commission (CFTC) compiled by Bloomberg.
The number of long positions in Brent Crude slumped to their lowest in nearly three years in the week to November 13, but the long positions in WTI Crude slightly edged up by less than 1 percent, snapping a six-week-long streak of weekly drops in longs. The number of short positions in WTI jumped by 12 percent. Yet, the slight increase in WTI longs last week could be a sign that some fund managers may resume going long, according to some market strategists who spoke to Bloomberg.
“Perhaps what we ended up getting was traders that looked at this and said, ‘Ok, you’re down 20 percent, maybe I should start throwing some longs on there,’” Bill O’Grady, chief market strategist at Confluence Investment Management, told Bloomberg.
Historical trends do suggest that oil prices may rebound over the month after the slump. The month after this price plunge features OPEC and allies’ official meeting, at which the partners are expected to discuss and possibly approve a new oil production cut. With signs of economic and oil demand growth slowing, the market may be expecting an announcement of a sizeable output reduction in early December, and could be bitterly disappointed should OPEC fail to live up to this expectation.
By Tsvetana Paraskova for Oilprice.com
