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Oil Volatility Fluctuations in violent uncertainty

The oil price rally stopped when investors withdraw, Trump promises a flood of OPEC oil and the global economy shows some signs of slowing.

Washington's "maximum pressure" campaign only led to a rise in oil prices a week ago, but prices fell on Friday after Trump tweeted that he "called OPEC" to tell them to increase production.

This means that price volatility has increased. The 3 percent drop in oil prices on Friday was the biggest one-day decline this year. But it came after prices rose almost at the beginning of the week when Trump surprised the world by deciding to extend sanctions.

As the Wall Street Journal notes, last week's oil prices caused multiple daily movements of at least 2.5 percent, the first time in two months. "It has been a massive roller coaster in recent months," said Tyler Ellegard, investment analyst at Gradient Investments.

Hedge funds and other money managers have increased the ratio of long-term bets to the ninth week consecutive week, an extraordinary bull sentiment demonstration. Fund managers have built up the cleanest long position since October 2018. At the same time, the rapid rise in long stakes threatens exaggeration, and on Friday it is assumed that investors reserve profits and split positions. Cropping long bets can in itself help stimulate a fall in oil prices. Related: Massive Decline in US Oil Rig Number Fails to Arrest Price Snapshot

However, there are also basic reasons why prices could reach a temporary limit. The market now appreciates the increase in OPEC + production, especially after Trump tweeted said there is a bigger offer. “Gasoline prices are falling. I called OPEC, I said you had to overthrow them. You have to overthrow them, ”Trump said.

Many reports indicate that Trump did not actually talk to OPEC officials. It is absolutely credible that there was an unofficial agreement between US and Saudi leaders in which Saudi oil would compensate for blackouts in Iran, although it seems more likely that the Trump administration and the Saudi government have a different interpretation of the agreement. This confusion does not help in terms of price fluctuations, because it is not clear in the coming months what to expect from OPEC +.

"Supposedly, [Trump] he spoke with Saudi Arabia and OPEC and persuaded them to allow more exports to cut US gasoline prices, "said Commerzbank in a note when she explained the recent fall in oil prices. But the bank noted that most of the price drops on Friday came before Trump released his tweet. This suggests that the excessive nature of speculative bets can be the culprit. Related: Rosneft Sees No Oil Deficit Occurs As Iran Sanctions End End

"We believe that the strong reaction is probably due to the fact that the futures market is currently overbought because financial investors have recently expanded their net long positions in Brent and WTI to a six-month high," Commerzbank wrote. “As a result, even small levels of uncertainty can trigger a stronger price response. However, as the supply situation remains tight, price increases are likely to recover.

Since the decision to impose sanctions on Iran in the US is now clear, the biggest variable in the oil market – and that behind such volatility – is how OPEC + will react. There are some in the coalition, especially Russia, who are trying to make a deal. On the other hand, Saudi Arabia is very reluctant to undermine the price rally, both due to last year's error that deliveries will increase too soon and the price pressures in Riyadh. Saudi budget requires roughly $ 85 a barrel to break, and while Saudi Arabia can run a deficit and raise funds by issuing a new debt – probably for a long time – it is safe to say that there is a desire for higher oil prices in Riyadh.

It is precisely because it is very difficult to predict how all these variables will come to rest, that we have seen such a sudden rise in volatility.

Nick Cunningham of Oilprice.com

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