Oil bears and bulls grapple in market puzzles
Trading in oil futures is as heavy as it was in the first months of the COVID-19 crisis, according to market data and analysts. The oil bulls and bears are scrambling to hedge against jolts in the steady rise in prices.
Despite weak demand, oil futures have already reached pre-pandemic levels, and Brent crude futures increased by $ 55 in less than a year to $ 70 a barrel this week.
However, speculation about when people will start traveling and commuting is driving duel stakes and historic trading volume in the market. What makes the current situation so obvious is the period of uncertainty as to how the solution will turn out.
The total monthly contracts for US WTI crude oil held by producers and traders rose to over 1 million in February for the first time since May.
Meanwhile, market open interest on ICE's Brent futures contract reached an all-time high with 2.8 million contracts on February 19, surpassing the last record in April last year. Open interest refers to a trader's long or short position in the market and reflects his sentiment on future value.
Oil market participants trade futures to reduce risks through price changes in their businesses. Manufacturers often use short positions to protect themselves from price drops, while consumers use long-term to take action against increases.
The recent rise in oil prices encourages both producers and consumers to enter the market. The potential for continued crude oil price increases is an incentive for physical market buyers to maintain a contract rate at current levels if prices continue to rise.
The disconnection between the four-month increase in futures price and slow physical crude oil sales indicates instability. Global demand is expected to meet supply only in 2021. Speculative, non-physical trading in the futures market contributes significantly to the ongoing volatility. Until there is a change in momentum and price stability parallel to the physical market, volatility is permanent.
A solid return for global demand may be the only exit from the market's toughest times ever. Up to March, price volatility reached the highs seen in the last Gulf War, and current highs are at their highest since November.
What is different this time around is the dramatic drop in consumer and commercial demand. As long as the impact of the pandemic is felt, price volatility seems to continue.
