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How the Oil Rally Turned Into a Crash

Oil prices have fallen fast in the past month.

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Benjamin Girette/Bloomberg

Just a month after traders were placing bets on $200 oil, prices are moving fast in the opposite direction. The shift has been shocking to some people who follow the markets, given the unprecedented sanctions that Europe imposed on Russian crude shipments on Dec. 5.

“December 5 was a potential End of Times moment for low oil prices,” said Robert Yawger, director of energy futures at Mizuho Securities USA. Prices were expected to “go to the moon and wipe out the global economy.”

Instead, prices have crashed. Brent, the international benchmark, fell below $80 per barrel on Tuesday for the first time since January and continued to drop on Wednesday. West Texas Intermediate, the U.S. benchmark, was down 3.3% to $71.84.

The crash has been caused by a mix of fundamental factors and trading dynamics. Yawger thinks that fundamentals carry about 70% of the weight and speculation accounts for the other 30%.

The biggest fundamental factor was that Europe’s ban on Russian oil shipments included a mechanism for Russia’s oil to flow elsewhere. Oil can still be sold to other countries like India as long as prices are capped at $60. So far, the price cap has allowed most Russian oil to flow to countries outside of Europe, though Russian supply appears to be down by a few hundred thousand barrels a day. At the moment that decline doesn’t seem to worry oil traders. They’re more worried about how the Fed’s decision to raise interest rates will impact the economy.

“They’re choosing to focus on [Fed Chairman Jerome] Powell as opposed to Putin,” said RBC Capital Markets analyst Helima Croft. 

Demand is clearly falling in several countries. U.S. data released on Wednesday showed that gasoline and diesel are building up in storage, meaning that refineries are making much more of it than people and businesses are using.

These dynamics are occurring at a time when liquidity in the oil futures market has dried up, meaning that prices are likely to be more volatile. There are “not many traders left playing the game,” wrote Rebecca Babin, senior energy trader at CIBC Private Wealth U.S., in an email to Barron’s.

And the investors that are still in it are looking to the downside. Traders have been making more bearish bets than bullish ones, a stark departure from their stance a month ago, when the ratio of bullish to bearish bets hit a record, Yawger said. 

On a technical level, there could be more pain ahead. Yawger wrote in a note that WTI could fall into the low-60s before it hits a technical support level where the selling stops.

That said, fundamental shifts in the market could cause prices to rise again.  There are at least three factors that could cause a bounce. OPEC, which cut production quotas by two million barrels a day in November, declined to expand those cuts this weekend.

But the group said it will act if the market becomes unbalanced. In addition, refiners could start to reduce capacity, meaning that less gasoline and diesel would be produced and the oversupply would dissipate.

And lastly, the U.S. is likely to slow or completely stop its sales of oil from the Strategic Petroleum Reserve (SPR) in the coming weeks. Those sales have allowed the U.S. to add to global supplies and keep oil prices low, but the reserve is now lower than it has been since the 1980s. This past week, the reserve dropped by 2.1 million barrels.

“One of these days, that number is going to be zero,” Yawger said. “And everybody’s gonna see that and that could pop the market, too. That’s proof positive that SPR is over.”

In fact, President Joe Biden has previously said that the Energy Department will consider buying oil for the SPR when prices fall to $72 or less—around where they are today. If the U.S. government becomes a buyer, that could force prices up.

Croft thinks that one of those factors is most likely to shift the tone soon. “Watch OPEC,” she said. “I think that’s the big next story.”

Write to Avi Salzman at


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