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Reasons Oil Crashed to Below $100 Again

Energy markets have entered correction mode, with prices substantially lower, following a wild three-week rise. Brent has lost 30% of its value since its intra-day high on March 7th, while European gas prices have dropped by 65%. The unfolding scenario can be attributed to speculative overreach, yet the overall picture remains favourable. According to commodity experts at Standard Chartered, the correction reveals more about market positioning and the impact of severe volatility than it does about fundamental shifts over the last week.

The surge in volatility in financial and commodity markets has resulted in a significant increase in traders’ risk exposure, as well as an incentive to close out some positions to reduce risk. In recent weeks, Oil traders have largely been positioned with a bullish bias in terms of both outright holdings and spreads, implying that optimization in a higher-risk environment has generally consisted of closing off prompt longs.

Reasons Oil Crashed to Below $100 AgainAs speculative shorts are scarce at the moment, natural buyers have been scarce, and the downside has swiftly opened up. While the price ranges involved were quite wide, recent market dynamics had all the hallmarks of a textbook speculative overshoot followed by the necessary correction to re-establish extreme positioning. The irony of the issue is that the widespread assumption among Oil traders that prices can only go up has led to a position where market fundamentals dictate that prices can only go down in the short term.

Despite the price drop caused by positioning, StanChart claims that the core fundamentals are mostly unchanged and are also susceptible to abnormally high levels of uncertainty. Consumer reluctance to buy from Russia, combined with capital, equipment, and technology limitations, are expected to continue to decrease Russian output for at least the next three years, according to analysts.

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