A slowing in Chinese economic growth, a devaluation of the yuan, the constant increases in oil reserves and OPEC’s refusal to drop their extraction quota have caused oil prices to collapse once again. Since May the oil market has switched into a bear phase.
Additional pressure on prices has come from the oil extraction companies themselves: via their hedging of risk. They attempted to fix the oil price for themselves on the futures and options markets for future extraction. In this case, they receive the difference between the current price and any fall in prices. It’s worth noting that not all oil companies were hedging their risks via options since, when purchasing PUT options, one has to pay a premium.
The options were used by the big companies. As an example, every year Mexico hedges risks from the possible fall in oil prices. Expenses for insurance can be anywhere from $750 million to $1.2 billion. In this case, the banks which sold PUT options had to hedge their risks on the market by selling oil futures, thereby pushing prices further down.
All of the important events from 1997 are marked out on the graph. If there was data available on Brent quotes from 1980 then I would’ve had the graph start from 1980. This year was an important one since this is when Brent became the main benchmark for the formation of Russian export oil benchmarks (Urals, Siberian Light and REBCO).
There’s no point in commenting on each and every event. It’s clear from the comment boxes which events had an effect on the oil market. This graph could be used in the future as a cheat sheet for oil prices for the last 24 years. Now to the analysis.
The comments with a white background relate to fundamental events and those with grey backgrounds relate to technical analysis. The latter have been numbered.
In 2008 the price rocketed from a 36.20 USD minimum and recovered by 50% to $89.55. From here the important $89 marker takes its beginnings. By March 2012, a barrel of Brent was going for $128.37 due to a growth in oil demand in developing countries. Then the market formed a triangle over the course of a year and from this the price headed downwards (2). From this moment a new fall in oil prices began.
Leave A Comment