Article / 08 December 2015 at 9:42 GMT

From the Floor: Oil's slide spews damage across assets

Consulting editor / TradingFloor
Norway
  • Asian stocks, especially energy sector, knocked by weak oil
  • Oil selloff generates new risk-off sentiment across asset classes
  • WTI crude eyeing $35/barrel, Brent looking at $40/b: Hansen
  • "Bloodbath" in energy-sector equities: Garnry

From the Floor Banner
 
By John Acher

A rout in the oil markets has spilled over into other asset classes — currencies, stocks, bonds, industrial metals — and sparked renewed risk-aversion as markets wake up to the reality that Opec's divisive Friday meeting failed to provide a lifeline to beleaguered oil.


"With Opec basically paralysed and unable to decide on anything but the status quo, we have seen WTI crude fall by another 6% to hit a fresh six-year low of $37.50/b,” says Christoffer Moltke-Leth from Saxo Bank’s Singapore trading hub.

Saxo Bank's head of FX strategy John J Hardy says: "Beware of anything exposed to oil currency-wise."

It's not only crude oil that's being sold off among commodities, Moltke-Leth says. "The broader commodity complex, including industrial metals, is hit pretty hard," he says, citing an all-time low futures price for iron ore for delivery in China and persistently weak copper prices.

Chinese economic data were also weak, contributing to the sour mood, with the trade balance coming in at a four-month low and exports falling by a steep 6.8% against an expected 5% drop.

"We have basically renewed risk-off sentiment, and we have seen a hard rally in fixed income, and Asian stock markets are selling off, especially the energy-sector names, obviously," Moltke-Leth says.

Bloodbath

Shares of Oil Search in Australia plummeted 16% after Woodside Petroleum walked away from a potential partnership, and China National Offshore Oil Corporation dropped more than 4%.

Japanese stocks were also under pressure, weighed down by a firmer yen, Moltke-Leth says. The yen was supported by final third-quarter Japanese GDP figures released on Tuesday.

The sharp selloff in energy stocks began already on Monday.

"We had a bloodbath in energy-related stocks, it was down significantly both in Europe and in the US (overnight)," says Peter Garnry, Saxo Bank's head of equities strategy.

"I think what 's really happening now is that investors are waking up to the reality that the Opec meeting on Friday didn't lead to anything positive for the market -- they raised the production cap, and it seems like the strategy now is just to flood the market with more supply to kill off competitors," Garnry says.

The plunge in oil prices supports Saxo Bank's equities strategy for 2016, Garnry adds. "You should be long US consumer stocks...You should stay away from energy and materials. We like China."

EURUSD supported

EURUSD has found support around 1.0800, but commodity currencies have been beaten amid the slide in oil prices, says Hardy.

"The main focus as we started the week is, of course, weak oil prices," Hardy says, noting that USDCAD has climbed to new 11-year high above 1.3500, and EURNOK has risen to 
9.40.

Hardy says EURNOK should be pushing towards its highs for the cycle of 9.60, as the market needs to price in more Norges Bank dovishness now that the latest downdraft in oil prices is creating some clear new risks for the Norwegian economy.

The Aussie dollar also weakened through some "interesting levels" on the back of weaker Chinese trade data, Hardy says.

With China's trade data showing signs of persistent weakness, it looks like the Chinese authorities are allowing the Chinese currency to trade a bit weaker, Hardy adds. "Just note that the Chinese currency is on the move."

Pump and dump fears

"The question everyone asks this morning is how low can it go -- oil prices, that is," says Saxo Bank's Hansen. 

Crude oil prices under pressure, testing sub-$40/b levels
Crude oil price
 




















Source: Bloomberg, Saxo Bank

"The market is worried about an internal pump and dump war within Opec," Hansen says, noting that only Saudi Arabia and Iran have significant spare capacity and those countries "do not see eye to eye on literally anything."

With Iran eager to raise production by 1 million b/d, the oil markets fear that Saudi Arabia could counter that with a million barrels of its own.

"That's really what is driving the market at the moment, because no doubt already before this latest selloff we had prices that were low enough to incentivise higher demand," Hansen says.

"The initial level to look at in WTI are the levels we are at right now, testing the lows from August, (and) Brent has done worse than that," Hansen says, noting that both WTI and Brent crude are setting lows about 10% above the recession lows of December 2008 "where demand basically fell off the cliff."

"This is a completely different situation. It's an oversupply-driven selloff. Demand is strong — it's as strong this year as it has been in a number of years. It will continue to be strong into 2016. That is going to leave us short of oil eventually, but that is no comfort at this stage when the market is terribly oversupplied, and worse is yet to come," Hansen says.

British industry in a suburb

British total industrial production rose in October, but manufacturing output fell, 
fresh data showed on Tuesday. Photo: iStock


John Acher is consulting editor at TradingFloor.com

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Editor’s note: From the Floor takes advantage of TradingFloor.com's unique real-time access to Saxo Bank’s various trading desks around the globe to put our community in touch with the developments that matter to their portfolios.
3y
Charles Asmar Charles Asmar
Hi John, It will be better to short our Brent position?
3y
John G Acher John G Acher
Hi Charles. I will refer you to Saxo's commodities chief Ole Hansen on that. I am just a journalist.
3y
Martin O'Rourke Martin O'Rourke
Charles, follow all of Ole's commentary here. https://www.tradingfloor.com/traders/ole-hansen We're biased of course but we think he's got a great handle on the markets and if today's media is anything to go by, so too do The Times and The Financial Times who quote Ole extensively.
3y
Martin O'Rourke Martin O'Rourke
WTI is now trading below $37/b at 1340 GMT. Chart courtesy of SaxoTraderGO
3y
ozy ozy
I follow Ole, and he's really great for oil.. near term I hope a strong rising on WTI.
3y
tradingwithapro tradingwithapro
This comment has been redacted

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