Oil's Financialization Rears Its Head

摘要

The global economy is roaring, oil supply and demand are balancing and inventories are drawing down - and yet benchmark Brent crude fell more than 7% in a matter of days, with US West Texas Intermediate (WTI) not far behind. Although a bearish US inventory report last week did contribute to crude's price retreat, nothing significant has changed regarding oil's underlying fundamentals, so what's going on? Thank the growing interconnectedness of financial asset classes, and the giddying declines and rebounds endured in global equity markets over the past few days. The oil price may not be on the precipice of another collapse, and over the long term, market fundamentals remain the primary factor guiding prices. But head-spinning bouts of volatility and temporary distortions between the price and fundamentals have become a fact of life, as the initial days of February illustrated. The US Dow Jones Industrial Average index swung more than 1,000 points several times last week, reflecting a broader global whipsawing of equities, bonds and commodities prices as investors suddenly adopted a "risk off" mindset. Crude oil got caught in the crosswinds (PIW May30'16). This new reality is difficult to make sense of, as it often causes prices to move in directions not supported by factors directly related to oil, or at minimum exaggerates moves. Both compromise producers' ability to confidently plan and invest in the long term (PIW Feb.5'18). In this most recent case, the equity pullback that entangled oil wasn't the result of concerns about the health of the economy - concerns which could be seen as bearish for oil since it could translate into lower oil demand. Rather, it reflected overinflated equity valuations in light of a looming higher interest rate environment.