Echoing what we said first two months ago ("Inside The Oil Market's Jekyll-And-Hyde Moment"), an observation confirmed first by Goldman on more than one occasion (here and here), and also the Saudi Energy minister bin Salman who one week ago said that “the paper and physical markets have become increasingly more disconnected” due to lack of liquidity, this morning none other than Pierre Andurand, the head of the world's largest oil hedge fund and the commodities trader known for his bullish calls (and record gains in the past year) tweeted that the oil futures market is now "completely broken" as futures can now move $10 lower a day “for no apparent reason” (just wait until he learns about S&P futures...)
The oil futures market is completely broken. Moving down $10 in a day for no apparent reason— Pierre Andurand 🇺🇦🌻🇫🇷🇪🇺 (@AndurandPierre) August 31, 2022
As Goldman explained previously, the financial market for oil is indeed broken due to a total collapse in liquidity and lack of hedging, which has led oil prices to have daily swings of more than $5 over a dozen times this year since Russia’s invasion of Ukraine.
While such moves once would have been considered out of the ordinary one upon a time, with open interest in oil futures at a seven-year low, bigger fluctuations have become the norm. Combined open interest on the four main Brent and WTI contracts fell below 4 billion barrels for the first time since June 2015 last week, Standard Chartered said in a note, while Goldman pointed out yesterday that both net spec length (i.e., outright bulls) and open interest have cratered.
“The market has stopped even asking why we are down $5 in a session or why we are down $2.50 this morning,” said Scott Shelton, energy specialist at ICAP.
Yet while financial markets remain skittish and continue pressing oil prices lower, the fundamental, physical market has become extremely tight, and as Goldman warned most recently yesterday, we may not be too far from an explosive move higher as the collapse in inventory finally spooks all the oil shorts and the same illquidity that has pushed oil lower sends it to all time highs.
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