Oil prices fell to an eight-month low on Tuesday as traders rushed to adjust option positions amid fears the global economic turmoil will cut demand.
The international benchmark Brent crude fell $ 4.65, or 6.6 percent, to settle at $ 65.47 per barrel. That was the biggest decline since July. US oil futures, known as West Texas Intermediate, fell $ 4.24, or 7.1 percent, to close at $ 55.69 per barrel.
Brent has fallen more than $ 20 a barrel from the highest level in October. This has declined for 11 of the last 12 sessions.
Traders said pressure on prices has been building for some time but points to technical factors in the options market, where options on WTI for December delivery will end on Wednesday.
Traders say pressure on prices has been building for some time but points to technical factors in the options market.
Options on WTI for December delivery will expire on Wednesday and a large position remains extraordinary to place options conferring the right to sell WTI at $ 55 per barrel. It gives shareholders an incentive to push futures prices in that direction – and sellers are forced to take short positions to protect their exposure.
"What you end up with is the risk of monster hedging," said Douglas Hepworth of Gresham Investment Management, commodity fund manager.
The loss of the snowball will cause pain to money managers, who still hold a net bullish position in crude oil futures which is equivalent to more than 400 million barrels. Some can be asked to liquidate their positions after receiving margin calls from brokers.
Prices fell on Tuesday as the OPEC research cartel group estimates world oil demand growth will grow 1.29 million barrels per day next year, around 70,000 b / d lower than previously estimated and down from 1.45 billion / d predicted. recently July.
The projection shows that Saudi Arabia and its partners inside and outside the cartel may be forced to limit supply to avoid a buildup of oil stocks. Manufacturers are anxious about the slowdown in the world economy, as trade tensions and weakening currencies of emerging markets, which Opec said could "pressure" oil demand.
Meanwhile, supply from within the US continues to increase. Washington on Tuesday estimated that production from shale areas such as Permian Texas and New Mexico would reach 7.8 m b / d this month, an increase of 117,000 b / d from the previous estimate. For December, the Energy Information Administration forecast a record 7.9 million b / d of shale output.
"When you put all these ingredients together, you have a recipe that isn't really conducive to a $ 85 market environment," said Michael Cohen, oil analyst at Barclays.
Energy companies were the worst performing sector in the S & P 500 index of large US stocks, falling 2.4 percent on the day.
Opec said supply growth in 2019 outside the cartel, led by the US, would be 120,000 b / d higher than originally estimated, more than 2.2 million b / d. Total production is set to reach an average of almost 62.1m b / d.
"The forecast for 2019 for non-OPEC supply growth shows higher volumes outpaced expansion in world oil demand, which led to widening oversupply in the market," Opec said.
Khalid al-Falih, Saudi Arabia's energy minister, said on Monday that OPEC and its partners had carried out an analysis showing that a decline of 1m b / d of oil supply from the October level was needed to balance the market.
"We need to do whatever is needed," Falih said, signaling a reversal in oil policy.
In June, OPEC and partners outside the cartel agreed to reduce restrictions on this place since 2017 after pressure from US President Donald Trump. Mr Trump called on OPEC and its allies to increase production to offset any decline from Iran after sanctions were reinstated against Tehran.
Even when Saudi Arabia promised to increase output towards 11m b / d, a move by the US earlier this month to issue relief to large buyers of Iranian oil and allow more oil to global markets had created renewed fears of oversupply.
Prices traded above $ 85 last month fell to below $ 70. Amid talk of restrictions on new supplies from producers, Trump took to Twitter this week to again push OPEC into action, saying "oil prices must be much lower".
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