The international oil price stabilized on Wednesday, following its worst one-day plunge since July, as fear over a slowdown in global demand gripped the market. Brent crude was 0.2 per cent higher in London trading at just over $65 a barrel after plunging 6.6 per cent on Tuesday. West Texas Intermediate, the US benchmark, continued to fall, by 0.3 per cent at $55.54 after tumbling 7.1 per cent yesterday. While the oil price has been in retreat since hitting a four-year high in early October, traders pointed to technical factors in the options markets to explain the severity of Tuesday’s drop.
Options on WTI for December delivery are due to settle today and large positions remained outstanding for put options conferring the right to sell WTI at $55 a barrel. That gave holders an incentive to drive futures toward that price — and forced options sellers to take short positions to hedge their exposure.
“What you end up with is monster hedging risk,” said Douglas Hepworth of Gresham Investment Management, a commodities fund manager. Oil was already falling on Tuesday, quickly erasing Monday’s bounce, after the research arm of the Opec producers’ cartel forecast world oil demand growth would grow by 1.29m barrels a day next year, about 70,000 b/d lower than its prior forecast and down from the 1.45m b/d it forecast as recently as July. The projection suggested that Saudi Arabia and its partners inside and outside the cartel might be forced to curb supplies to avoid a build-up of oil stocks.
Producers are anxious about a slowdown in the world economy, given trade tensions and emerging market countries’ currency weakness, which Opec said could “pressure” oil demand. Meanwhile, supply from inside the US continues to rise. Washington on Tuesday estimated that production from shale regions such as the Permian of Texas and New Mexico would reach 7.8m b/d this month, an increase of 117,000 b/d from its previous estimate.
For December, the Energy Information Administration forecast a record 7.9m b/d of shale output. “When you put all these ingredients together you have a recipe that’s not really conducive to an $85 market environment,” said Michael Cohen, oil analyst at Barclays. Brent crude, which topped the $86 a barrel mark on October 3, has now fallen by almost a quarter since then.