After weeks of continued inventory gains, oil prices finally succumbed to the weight of pork oil. The EIA inventory report showed a crude increase of 8.2 million barrels and prices promptly dropped on the news. WTI crude declined by $4 (7.5%) over the next two days, with most of the loss coming on the day of the inventory news.
A good piece from FT.com highlights the main issue, the significant long bets of Hedge Funds as captured in the Commitment of Traders category "Managed Money Traders." Even though OPEC and Russia have agreed to limit output, the dominance of money managers in price determination pushed prices high enough for US shale drillers to lock in prices out along the futures price curve. As the FT article points out, the number of shale rigs has nearly doubled since last May. This puts everyone else in a tight spot, as it's in everyone's interest to keep prices from tanking. The Hedgies now have to protect their long bets, and they are most likely doing so through option contracts on WTI, which experienced its second highest volume ever, according to this Bloomberg.com article.
Bad news for investors and producers, however, is good news for we consumers. I expect the vested interests will continue to try to prevent prices from collapsing, so prices will probably fall a bit more, but they will resist at $40.
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