Crude Oil Prices Are Experiencing Extreme Volatility

Crude oil prices have experienced a sharp decline this week, erasing gains made around April 1st when OPEC+ unexpectedly decided to cut production. Prices are now trading lower than that level, and it is believed that there will be some pullback. Interestingly, there is a disconnect between crude prices and oil inventories. Typically, rising US inventories cause prices to fall, while falling inventories push prices higher. However, large inventory draws over the past couple of weeks have failed to prevent significant price falls. Crude oil inventories have fallen below the five-year average for the first time this year, and yet prices are in free fall.

Saudi Arabia cut its official selling price of crude to Asia on Thursday. Saudi Arabia's crude oil price moves are a closely watched element in the oil markets and are generally viewed as a trendsetter when it comes to crude oil pricing. Asia is lapping up cheap Russian crude, so Saudi Arabia is enticing India and China by cutting its price. Another reason for falling crude oil prices is weak economic data from China. China's factory activity dipped in April, according to the private Caixin purchasing manager's index. The US banking crisis is also not helping sentiment in crude, as any financial crisis affects crude prices. Moreover, there are reports that Russian crude shipments remain strong despite sanctions and embargoes. Reuters reported that April oil loadings from Russia's western ports are on track to reach their highest level since 2019 at more than 2.4 million barrels per day. So, in a scenario where demand is expected to be weak and supply is still forthcoming, prices are predictably in a downward trend.

However, all is not lost for crude. On the flip side, the Fed gave signals that it may now take a break from rate hikes, which should have a positive effect on prices. Also, the prices have corrected sharply, and OPEC+ will not let the price drift down further as they have to balance their budget, and the sweet spot for them is around $80 per barrel. So, despite strong negative news, we will see crude bouncing from current levels.

In MCX, Crude oil futures are near their oversold zone as RSI_14 is at 32. Historically, prices have bounced at least 6 to 8% whenever they have come near the oversold zone. This time also, we expect the same to happen, and it is a good opportunity for traders to go long with a short-term perspective. The risk/reward ratio favors the long side, so we recommend traders to go long at current market levels with a stop loss of 5400 and an expected target of 6100 and more.

Speculators are once again fleeing the oil market, setting the stage for more extreme price swings. Money managers dumped their net-bullish oil holdings by 19%, the biggest drop in six weeks. The positions are now at the lowest seasonal level in more than a decade. The exodus comes amid another crash for oil, driven by concerns over the economy. West Texas Intermediate (WTI) futures have tumbled for three straight weeks, even briefly plunging to the lowest level since late 2021. With investors rushing for the exit, liquidity is drying up, and markets are largely in the hands of algorithm- or momentum-based traders – a scenario that often creates even more volatility, according to Michael Tran, managing director at RBC Capital Markets LLC.

“In short, the oil market needs more players on the field,” Tran said.

Money managers' WTI net-long position, or the difference between bearish and bullish bets, dropped to 157,047 contracts in the week ending May 2, according to data released 

on Friday by the US Commodity Futures Trading Commission. Speculators' share of open interest, a measure of market participation, is near the lowest level in three years. Without speculators, prices can become disconnected from supply and demand drivers. This can create pain for hedgers, merchants, and producers who cannot walk away from the market even when it is moving counter to what physical fundamentals dictate. Implied volatility climbed to the highest level in more than a month recently.

This kind of exodus has driven extreme price swings in the past. Last year, a combination of higher collateral requirements and rising interest rates dented demand from speculators who sometimes use oil as a hedge against inflation. The sapping liquidity caused increasingly erratic intraday price moves. By the end of the year, more than $120 billion had poured out of global commodity markets.

Part of the reason oil speculators are staying on the sidelines is that they have been burned repeatedly. For example, in early April, they were holding a very large short position, or bets on falling prices. But Saudi Arabia and allies, known as OPEC+, announced surprise production cuts that sent prices surging, catching many investors wrong-footed. Instead of buying back into the market with long holdings or new short bets, the money managers have decided to stay on the sidelines.

WTI settled on Friday at $71.34 a barrel. Earlier in the week, the price touched $63.64, the lowest since 2021. For bulls to return, it will likely take both signs of a meaningful slowdown in Russian output and a sustained recovery in Chinese demand. Ultimately, when the oil market struggles, it can also pull other commodities lower as traders get margin calls across the sector, said Carley Garner, a commodity broker and strategist at DeCarley Trading.

“We’re not there yet, but if oil drops below $63, it will cascade in other markets – even stocks,” she said. “Oil lures speculators when prices move higher. They need to see a more rational market.”

Crude Oil had a tough week and finished in the red for a third consecutive week, printing a new multi-month low in the process. The strong rally to close out the week may have staved off what would've been one of the worst weeks for oil in recent memory. Oil prices are struggling to shake the doom and gloom in markets at present, which are driving overall sentiment and negatively impacting oil prices. This dent in sentiment has come about thanks to a host of factors, including renewed US Banking fears, concern over manufacturing and industrial data out of China, falling US inventories, and a failed deal to unlock Kurdish Oil exports.

US Inventories data from the EIA declined by around 0.3% for the week ending April 28, marking a third consecutive week of declines. Crude in the Strategic Petroleum Reserve (SPR) declined 2 million to 364.9 million barrels, its lowest since October 1983. Levels dropped for the third week in a row as part of a congressionally mandated sale of 26 million barrels. Despite oil prices recently being in an area that market participants hoped would spur the US government into action to replenish the SPR, the Biden administration confirmed that refilling the SPR would take time. In a further nod to a slowing economy, demand for motor fuel ahead of the peak summer driving season fell significantly, down 9.4% to 8.6 million barrels per day.

Heading into the new week, a lot rests on sentiment and, in particular, how the US addresses ongoing concerns around regional banks. The weekend provides US authorities with an opportunity to iron out any further response and actions should they wish to calm market participants moving forward.