Oil Tumbles Below $48 As JPM Warns Of Possible Commodity Liquidations

Tyler Durden's picture

Any hopes for an early rebound in oil following last week's torrid plunge in WTI and Brent appear to be dashed, at least at the open, when WTI promptly tumbled below $48/barrel.

While there have been no materal adverse catalysts over the weekend, three factors are being mentioned by Sunday night trading desks as drivers behind the latest seloff.

First: price momentum has simply persisted from the Friday US selloff, as Asian funds catch up to the US action. 

Second, some have pointed to a report by JPM's Nikolaos Panigirtzoglou from Friday evening, which warns of "commodity downside" as a result of persistent near-record net long futures positioning, and warns that "a pending normalization/mean-reversion of spec positions in commodity futures has begun." Here are some of the reports highlights:

  • Spec positions stood at pretty elevated levels as of last Tuesday March 7th, the latest available snapshot, suggesting that this normalization is at its beginning rather than its end phase.

  • Even if we assume that the change in the open interest since last Tuesday reflects entirely a build up of short spec positions or a reduction of long spec positions, the commodity position overhang would remain.
  • This pending mean reversion in commodity spec positions is unlikely to be prevented by the growth of commodity index products.
  • In our opinion, the demand for long positions in commodity futures contracts created by passive commodity index products acts merely as a background force.
  • Mean reversion is primarily driven by active investors such as hedge funds and in particular CTAs.
  • Simple return momentum trading models suggest that CTAs are turning incrementally more negative across most commodities.
  • We get a similar overbought picture in commodity equities, by looking at the short interest of the biggest commodity stocks in world equity markets.
  • Therefore any further unwinding of commodity futures positions is likely to be accompanied by an increase in the short interest of commodity stocks.

A third possible catalyst for the drop is the yet another prominent voice in the oil industry has slammed the OPEC gambit, this time Leonardo Maugeri, a "Senior Fellow with the Geopolitics of Energy Project and the Environment and Natural Resources Program at the Harvard Kennedy School’s Belfer Center", though better known as the former head of strategy at Italian energy giant, Eni. His reported is titled simply "OPEC’s Misleading Narrative About World Oil Supply" and as the title suggests, Maugeri is the latest to point out that the OPEC emperor is naked and that OPEC's actions have, at best, served as psychological support to oil prices:

At a time when energy market headlines focus mainly on OPEC cuts, observers may be forgiven for concluding that a supply crunch and higher prices are imminent. On the contrary, there is still too much oil in global markets. In this context, OPEC production cuts (which notably fall short of the original target envisaged by the organization) appear to serve mainly as a psychological support to oil prices.


... the global oil market remains highly vulnerable to the actual status of oil supplies. There’s a paradox: so far, OPEC’s effort to convey the message of an exceptional level of compliance with cuts has helped sustain oil prices—but in so doing it has also incentivized oil output increases in many countries. The United States is by far the main beneficiary of such price support. In early February, almost all US shale oil producers have presented plans to strongly increase their shale oil output in the course of 2017.


To make matters worse, a heavy global refinery maintenance of around 3 mbd—concentrated in March and April—would lower crude demand and could add to temporary crude builds. When it starts to ease, the OPEC and non-OPEC cuts will be close to expiration—June 30, 2017.

Whatever the reason, for now the selling has continued, and if JPM is correct and momentum and trend chasing CTAs are now in charge, the next level may be far - and sharply - lower from current prices.

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Escrava Isaura's picture

Greg Machala: If Gail is right (which I suspect she is) then the current “oil-glut” is not really a glut, but an oversupply of expensive oil that economies of the world can no longer afford. If that is the case then, we are facing a massive problem. It means we are out of zone where oil is both profitable to producers and affordable enough to grow the economy. If that is true then financial collapse cannot be far off.




espirit's picture

Oh. So the Hedgies don't want to play your game of Cushing Build/Cushing Draw anymore on a daily basis?

Let your Algos eat each other, mutherfuckers.

Houses Depreciate's picture

Falling prices.... especially housing and oil is positive economy news. Both have a very long way to fall.

Escrava Isaura's picture

I disagree. Depression is bad, real bad.

We need the debt to disappear.

Why that the young understands that but the conservatives can’t?

It bugs the mind.



Houses Depreciate's picture

Nothing accelerates the economy, creates jobs and raises the standard of living like falling prices to dramatically lower and more affordable levels.

Escrava Isaura's picture

Bad thinking that leads to unnecessary pain.

Incomes and job growth need to raise.

See how much better that is.


Houses Depreciate's picture

Do you really believe wages will triple or quadruple to meet these rigged, fixed prices at grossly inflated levels? 


Don't be a fool.


Prices will continue falling to dramatically lower and more affordable levels meeting incomes.

crossroaddemon's picture

Both of you are wrong. The great depression was a deflationary event... wages went right down along with prices IF you were lucky enough to be employed at all. It'll happen again. On the other hand, shit is massively overvalued and thinking that inflation-adjusted wages will ever rise to 1965 levels is laughable. 

Houses Depreciate's picture

Precicely what I just said.

Prices have a long way to fall.

Escrava Isaura's picture

Houses Depreciate: Do you really believe wages will triple or quadruple to meet these rigged, fixed prices at grossly inflated levels? 

Again, bad thinking.

Just tax people that are being overpaid and those prices won’t raise.

See, no one got fired. No inflation.

And no depression.



Houses Depreciate's picture

Again, incorrect thinking.

Remember..... Nothing accelerates the economy and creates jobs like falling prices to dramatically lower and more affordable levels.

crossroaddemon's picture

Examples of when this has been observed? Last time we got massive price defaltion in the US we also got massive wage deflation. That was the depression. Sure stuff was cheaper... but you probably didn't have any money to buy it.

Houses Depreciate's picture

Input prices fall. And the economy always accelerates when input prices fall.

Escrava Isaura's picture

Ok, you won.

But everyone else lost.


Houses Depreciate's picture

Everyone wins when prices fall to dramatically lower and more affordable levels.

cowdiddly's picture

47 handle. Do I hear 46......crickets

espirit's picture

Lots of rigs gonna go belly up under $60 per barrel. Support staff is Yuuge.

Anybody else smell cash burning?

Volkodav's picture

but pump price is rise?

gseattle's picture

I would like to know why some consider lower gas prices to be bad. Seems to me if it were 50 cents a gallon at the pump it would put the economy on sterioids, especially if companies would pass the savings along to consumers with lower prices in stores.


By the way, I'm new here and while I had seen the word ZeroHedge around the web on twitter etc, it really came into focus thanks to a friend of mine. She's a fan. She's also a Liberal who once gave talks for Dems in CA. She voted Trump quietly as many of the thoughtful Liberals did.

Privyet_Jet's picture

I'll take what is geopolitics for 2000, Alex

espirit's picture

Not bad as long as we can keep supply ahead of demand. Seems our strategic reserves are full thus requiring to increase exportation.

Can't hold on to foreign reserves unless we can justify military demand.


BTW - Don't be a troll. 

Houses Depreciate's picture

With a globe awash in excess crude and massive excess capacity and demand falling, I don't think there will be any problem with supply.

espirit's picture

Shouldn't be a problem until the minors are gone, then the major players set the price.

Question for the Board: Why did Saddam invade Kuwait?

Houses Depreciate's picture

Production cost +profit set the price or roughly $6/barrel

Houses Depreciate's picture

Hint: Horizontal borings are the the same cost as traditional boring.

espirit's picture

Into Iraqi reserves?

Like a little bit pregnant, doncha think?

crossroaddemon's picture

Because they're trying to support modern tough oil plays like shale that require high prices to be extractable. I say fuck it, let's just start buying the cheap shit from Iran and Russia.

hairball48's picture

@ gseattle Lower prices are not bad.

Yellen, Krugman, the central bankers, all the Keynesians  are wrong when it comes to monetary theory.

Go to Mises.org and inform yourself regarding "Austrian" economic theory,

sinbad2's picture

"Seems to me if it were 50 cents a gallon at the pump it would put the economy on sterioids"


Yes you would think so, BUT the US economy relies on the revenue it makes from petrodollars.

American banks make $1 billion dollars a day in money changing fees alone. If the price of oil is lower, countries need fewer US dollars to buy oil, and the sellers have less money to invest in the US economy, and less dollars to convert into Riyals etc.

Profits of the major oil companies have taken a major hit and they are borrowing money to pay dividends to share holders.

We have all heard the stories of how this country or that couldn't survive without oil sales, well the US is one of those countries.

fowlerja's picture

Yes...evertime I fill my auto with fuel... I think about possible commodity liquidations and the impact on future gas prices....

yogibear's picture

OPEC, your plan was to bury US producers. 


JamesB's picture

Isn't it a mathematical certainty that shorts and longs in the commodity pits are always equal to each other for a particular contract?

If there is record speculative longs, that must mean others are short - I would bet on the shale companies.  Normally the refiners would be long, but if the short contracts from the shale producers overwhelmed demand from the refiners, then the banks (speculators) have to absorb the rest.  Why they did so at such high prices is a mystery.

MrNoItAll's picture

We are burning oil much faster than we are replacing it with new discoveries.  We are in a historically low CAPEX outlay period.  The oil majors and minors are not investing in exploration and development because there isn't much left that is economical to go after, not at current and reasonably projected prices.  Don't let the constant barrage of propaganda and all the OPEC and Saudi-versus-America bullshit blind you to this one fundamental fact -- the global economy is dying due in significant part to deficiency of AFFORDABLE oil, a condition that has been ongoing for many years, and getting incrementally worse with each passing day.


Houses Depreciate's picture

With record supply and slipping demand, oil is going to get a whole lot more affordable.

crossroaddemon's picture

What you're going to see, maybe in our lifetimes, is a point at which it's not available to the public. There might be plenty left in the ground but at an extraction price so high that you and I can't fucking afford to buy it. 

Houses Depreciate's picture

$6/barrel is certainly affordable.

espirit's picture

But you can only pump those nearly dry wells during periods of GloBull Warming.

Houses Depreciate's picture

A globe awash in oil and falling demand.

Blazing in BC's picture

The "oily" bird gets the worm.

Ben A Drill's picture

Lower oil prices and Canada just might go belly up. Didn't ZH say their banks suck, housing bubble, locals can't afford rent? Please tell me actually what is good about Canada. Rains to much, cold, government takes 50% of your salary.

espirit's picture

Can't say much about Canada, never been there.

But I have heard they have Maple Syrup, Maple Leafs, and a Liberal amount of fruit(s).

Please correct me if I'm wrong.

gregga777's picture

Focusing on the price of oil is a canard because the price is defined in an inherently elastic fiat currency (currencies).  The true focus should be on thermodynamics.  This is where the Peak Oil debate went awry.  Every barrel of oil lifted from underground, whether using inherent reservoir gas pressure or artificial pressurization, requires incrementally more ENERGY.  All oil is lifted from underground using the ENERGY contained in that oil.  Therefore, in thermodynamic terms, there comes a point where more ENERGY is required to lift a barrel of oil from any given reservoir than is contained in that barrel of oil.  Bear in mind, that thermodynamically a large portion of the ENERGY in any barrel of oil is wasted.  That is a thermodynamic given and it is inviolate.  That is where the nature of fiat currency temporarily disguises the truth with monumental increases in debt.  At least 80% of all world oil reservoirs are in terminal decline.  There has not been a supergiant oil field discovered for more than 50 years.  The Thermodynamic Oil collapse is, at some point in time, going to enter the "Seneca's Cliff" downward trend, effectively terminating irrevocably our global industrialized civilization.  The result will make World Wars 1 & 2 look like Teatime at the Ritz.