Is the oil market “oversold”? What analysts and traders say about the plunge in crude oil prices | Wilnesh News

Oil prices fell sharply in defiance of an announcement by the OPEC+ alliance to extend production cuts, with analysts and traders criticizing certain trading strategies and sluggish demand.

“There is a mood among traders to change and reposition short positions versus long positions,” energy consultant Abdulaziz Almoqbel told CNBC’s Dan Murphy on Wednesday. , which is what price action is actually signaling. In this case, short positions refer to activity in the futures market, profiting when prices fall, and their opposite long positions cashing out when prices move higher over the long term.

“I would say the market is experiencing oversold conditions right now, and a technically oversold market is driving prices down,” he noted.

On Sunday, the Organization of the Petroleum Exporting Countries and its allies, collectively known as OPEC+, decided to extend existing formal production cuts that were scheduled to end this year and voluntarily cut production by about 1.66 million barrels per day. These restrictions will remain in place throughout 2025.

Several OPEC+ members have also voluntarily cut production by an additional 2.2 million barrels per day from the second to the third quarter of 2024, with a view to gradually returning these outputs to the market by September 2025.

“I think there are a lot of commodity trading advisors … and the (algorithms) and options market, it’s a huge contract market that affects the latest price movements,” Almokhber added.

“If you look at every OPEC+ meeting that has been held in the past 36 months, you will see that after every meeting, prices have fallen.”

Despite the prospect of tight markets, oil prices fell below $80 a barrel per day. At 11:14 a.m. London time on Wednesday, the Brent crude contract expiring in August was trading at $77.59, up $7 a barrel from Tuesday’s closing price. point. The front-month Nymex WTI contract was at $73.28 a barrel, up 3 cents a barrel from Tuesday’s settlement price.

“Oil prices have fallen by nearly $5/b since Friday. While some blame the OPEC+ meeting for the decline, we believe other factors such as the options market also played a role,” UBS strategist Giovanni S Giovanni Staunovo said on Tuesday a note of caution to customers.

“Prices are likely to remain volatile in the short term. We believe renewed inventory reductions are needed to push oil prices higher.”

In the oil market, options are often used as a hedging mechanism to protect against price changes.

Protective “put” and “call” contracts (types of financial derivatives) can set upper and lower limits on the range of price movement before the position is terminated. Futures hedging can also be used to protect the value of crude oil production or goods traded in the spot market.

OPEC+’s weekend output strategy decision has so far failed to boost prices, given that countries with voluntary production cuts have announced in advance how they plan to restore 2.2 million barrels per day of supply after the end of the third quarter. Daman Struyven, Goldman Sachs’ head of oil research, told clients that the meeting brought a “negative surprise” to the market and raised downside risks to Goldman’s forecast that Brent crude prices would hit a range of $75 to $90 a barrel.

Also looming is uncertainty about the demand outlook, which has put the OPEC secretariat and the Paris-based International Energy Agency at opposite ends of the spectrum. OPEC’s latest monthly oil market report for May predicts that oil demand will increase by 2.25 million barrels per day this year, while the IEA predicts that demand will increase by only 1.06 million barrels per day. Demand typically picks up in the summer due to higher gasoline consumption due to seasonal increases in driving and the end of refinery maintenance work in China, the world’s largest crude importer.

However, three crude oil traders, who could only speak anonymously due to confidentiality agreements, told CNBC that demand for Asian crude has been low, with one adding that part of the upcoming demand increase has been “borrowed” as some Physical crude oil quantities will be carried forward.

“If you look at the latest price action, you would think we are in an oversupplied market. However, if you look at supply constraints and the realignment of global energy supply dynamics, it becomes clear that this market is definitely not in surplus. ,” said Almokhber. “So it really depends on where you want to look, whether you’re looking at supply or demand to really understand the situation.”