The summer driving season of despair ends with a critical price breach triggering a cascade of stop losses
Oil prices continued to plummet at the NYMEX Sunday open, wasting little time picking up from where Friday’s beat down left off.
Into weeks’ end, crude oil prices got hammered lower in concert with weakness in US equity markets. Indeed, for the oil’s complex, it was terrible timing for a general market risk meltdown, which coincided with the US Labor Day weekend and the end of the US driving season where oil traders were in a de-risking mode anyway.
Continued US dollar strength kept the pressure on oil prices. And bearish price action on the broader market was also a factor suggesting it is not only the September seasonality effect that was hurting oil.
It was a double-barrel effect as the combination of seasonality and general dreary market sentiment contributed to the precipitous price fall into the long weekend. And traders were not pricing for any colossal pick up in demand as US driving season takes its final lap.
The US driving season is coming to an end, signalling a significant drop off on gasoline demand amid one of the most morose pandemics impelled dormancy ever in US travel.
So, while peering into the September viewfinders, traders not only find themselves at the end of the runway on bullish catalysts but have now overshot the runway and fallen into a possible brink of despair as the key fundamental and psychological WTI $ 40/ barrel gave way triggering stops in cascading fashion.
In a market that is pinning hopes on a vaccine sooner than later, oil prices did not like the latest vaccine news, as Moderna says it is slowing the newest trial to ensure diversity.
The report comes at a time when Labour day holiday coronavirus risk could skyrocket in the US if September 4th revellers are too reckless and not adhering to best social distancing practices.
And now traders are looking over the shoulder for where then next price anvil falls after a coronavirus model often cited by top health officials predicted Friday that death counts could reach more than 400,000 in the US alone by January. This is due to seasonal concerns as the northern hemisphere heads for colder autumn months, forcing social activity indoors where the risk of catching the virus rises if peoples’ bravado to the acquiring the virus takes over and mask use wanes.
And rubbing salt in the wounds, Chinese seaborne crude imports are reported to have fallen 5.4% in August to 10.9 million barrels per day, down from a record high the previous month.
And as widely expected, Saudi Aramco lowered its October official selling prices (OSP) but still provides bearishly poor optics. To encourage China to keep the flow of crude moving amid a worrying signpost that the world’s biggest exporter sees fuel demand waffling as global pandemic flare-ups do the landscape.
For the first time in four months, Saudi Aramco lowered its October OSP for crude supplies to Asia by $1.40/b to a discount of 50 cents per barrel against Oman/Dubai. Prices were expected to be cut for Asia-bound crude by $1-$2 per barrel.
We have not seen such a severe case of pilling on to this degree in the oil market in a while. And traders do not have to look too far to tell things are pretty bad out here when not even better than expected non-farm payroll report cannot rally the bulls.
However, the robust jobs data does suggest hopes for a more massive than expected stimulus deal or even a move back to the bargaining table lessens if Democrats insist on $2.5 trillion as a starting point.
I am not sure the flagging seasonality price action is catching too many pros by surprise. The intensity of the sell-off is where seasonality concerns are getting compounded by autumn virus fears amid a general de-risking across broader markets.
Oil is a funny beast these days and so hypersensitive to negative news. And, after a massive 9 % weekly sell-off, traders might need some monetary or fiscal policy encouragement to jump back on the saddle again in any meaningful way.
Oil markets analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp