Sat | Apr 29, 2017

Oil is on a crazy ride

Published:Tuesday | September 1, 2015 | 9:03 PM

Commodity markets are renowned for their booms and busts but the last four days in the crude oil market have even experienced traders wide-eyed.

The price of oil plunged eight per cent on Tuesday, following a three-day ascent of 27 per cent, the biggest such jump in 25 years.

"It's wild!" said Phil Flynn, energy analyst at the Price Futures Group. "Buckle up."

The stock market has been volatile too, but nothing like oil. The S&P 500 has moved up or down by 6 per cent or more only once since 2008. Oil has moved by at least 6 per cent each of the last four trading days.

Big moves — mostly down — have been a hallmark of the oil market over the past year. Starting last summer oil began to fall, sliding from near US$100 to under US$45 in March. US oil production was booming, OPEC nations kept oil flowing and even rising demand wasn't enough to absorb the flood of oil.

Then oil's moves became more sudden in the spring and summer. Oil rose 25 per cent in April. It fell 21 per cent in July. It sunk to a low of US$38.24 last Monday, the lowest price since the depths of the recession in 2009.

The big decline in price was easy to explain. Against a backdrop of rising global supplies came mounting evidence from around the world that demand for oil would be far less than expected. The plummeting stock markets in China and the government's decision to devalue its currency led to fears that economic growth there was slowing sharply.

Japan, the world's third largest oil consumer, revealed that its economy contracted in the second quarter. And economic growth in Europe appeared to be in peril as the Greek debt crisis worsened.

At the same time, the United States and Iran reached an agreement that could lift sanctions against the OPEC nation, paving the way for more Iranian oil to return to the market, adding to already high supplies.

But the market was clearly uncomfortable with oil under US$40, traders say. And at any sign that perhaps supply and demand weren't quite so out of whack, they were ready to buy.

China's stock market soared last week, a possible signal that the worst was over. On Monday the US Energy Department changed how it estimates domestic oil production and revised its numbers significantly lower. A bulletin from OPEC suggested the cartel might be ready to work with other nations to restrict production.

Traders bought, and bought, and bought, leading to the nearly 30 per cent jump in prices over the span of a few days.

Stiil, some traders weren't impressed. Citibank's Ed Morse wrote on Monday that the surge was a "false start" brought on by trading technicalities, a "gross misrepresentation" of OPEC's intentions and confusion about the Energy Department's new methodologies. He predicted oil would head lower.

That call looked prescient Tuesday when oil plunged US$3.79 a barrel, or 7.7 per cent, to close at US$45.41 as weak manufacturing data out of China raised concerns — again — about economic growth there.

In other energy trading:

* Brent Crude, a benchmark for international oil used by many US refineries, fell US$4.59 to close at US$49.56.

* Wholesale gasoline fell 10.3 cents to close at US$1.396 a gallon. That will help push retail gasoline prices lower in the coming weeks. The national average retail price of gasoline has been sliding steadily since mid-June and fell a little more than a penny Tuesday to US$2.46 a gallon, according to AAA.

* Heating oil fell 12.3 cents to close at US$1.578 a gallon.

* Natural gas rose 1.3 cents to close at US$2.702 per 1,000 cubic feet.