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.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
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.

Jäger's picture

Iran and Russia are not even beginning to pump the massive oil fields they sit atop- why do you think the west is gunning for them?

crossroaddemon's picture

And they have the stuff that is cheap to extract. All they gotta do is pump like a motherfucker and shale is going to be old news. I'm comfortable with that; so far as I'm concerned cheaper is better period.

Escrava Isaura's picture

If you are not going to research, you should not comment on science matters. Comment on religion, politics, sports, or something like that.


Houses Depreciate's picture

If you're not going to comment on field development and production, you shouldn't comment on supply, demand and price matters.

Escrava Isaura's picture

Fred Magyar: I could give you a hundred links, scientific papers, titles to books, university lectures, Youtube videos, etc, etc… explaining why the answers are yes and why your personal observations are irrelevant but it wouldn’t matter one damn bit, because your mind, for whatever the reason is already made up and solidly sealed shut.

As they say, a mind is terrible thing to waste. And your post is a glaring example of a totally wasted mind! How sad!



flicker life's picture

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... http://bit.ly/2jdTzrM

crossroaddemon's picture

Given that a great deal of my business takes place out in the Bakken and I frequently rub shoulders with people who work out there (inlcuding engineers and admins, not just roughnecks) I'm guessing I'm probably more informed about this than you are. Liquid, land-based plays are the cheapest thing to extract. Period. Shale will never compete with that.

mkkby's picture

Cock scarfer cites *Gail*, who is a doom porn selling crack whore.  Neither of them have any understanding of science, common sense economics or trading.  Gail has been peddling end of world shit for at least a decade.  How's that worked out?

Oil futures tanking very rapidly has NOTHING TO DO WITH science or oil economics.  None of that changes on a day to day basis.  The only thing that does change is hedge fund/bankster speculation.

Hedgies have finally gotten it into their heads that Yellen is raising rates for real.  So they are taking the reflation trade off before their competition does.  That means everybody heading to the exits.  Are they right?  50:50 at best, but it's all just a big casino.

Escrava Isaura's picture

Iran oil peaked in 1972. Even if Iran could go back to 2007 levels, that means 3 hours of consumption in the US.

Rystad Energy’s analysis predicts that output will not reach the pre-sanction level, which is above 3.7 million barrels per day, mainly due to the country’s lack of new investment and declining production rate from maturing fields.


Notice that about 60 percent of all Russian oil comes from those very old Western Siberian super giants fields with that percentage declining only very slightly in the future. How can that be? They drilled 8,688 new wells in Russia last year, most of them infill wells in Western Siberia. Do they really expect to poke more holes in those old fields and and continue to get oil from them for another 25 years… or more?



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?

Jäger's picture

Janet raising rates this week sends oil back to the 30s

thecondor's picture

I'd be happy with that. Less money for gas and more money paid to me for loaning money to the bank and probably lower silver prices.

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

Jäger's picture

The only ones who think low oil prices are  bad are the banks that made loans to shale companies with the idea that oil was going to stay at $80+ for a long time.

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.