It was a very ugly night for the Andy Halls, Pierre Andurands and other crude longs, after oil flash crashed just before midnight ET, dragging WTI from above $45/bbl to below $44 in seconds on a surge in volume, to the lowest price since OPEC agreed to cut output in November.
As shown in the chart below, in less than 10 minutes futures slumped more than $1 as volume surged 14 times.
And while WTI eventually rebounded from its overnight snap, and was back above $45, putting this week's rout in context, oil prices have collapsed by more than 10% %, sliding to lowest since Nov. 15, or two weeks before OPEC signed 6-month deal to curb production aimed at easing global glut. The decline has been driven by expanding U.S. output before OPEC is set to decide whether to prolong its cuts.
To frame the collapse of oil in particular, and commodities in general, here is Bloomberg's macro commentator Mark Cudmore, explaining why "the commodities selloff of the past two months is arguably the single largest macro factor shifting the view on how to play the months ahead. There are consequences for FX, rates, credit and equities markets."
From his overnight Macro View note
Commodities’ Micro Catalysts Have Macro Consequences
Commodities have had yet another terrible week. This is a great example of how individual and largely unrelated micro triggers can combine to have severe macro consequences.
The Bloomberg Commodity Index has fallen more than 8% from its February peak, to an 11-month low.
Our commodities team have been at pains to highlight the idiosyncratic factors driving the moves: oil is being hit by rising U.S. production, copper’s fall was triggered by the whopping LME stockpile-build, iron ore slumped on China concerns, agricultural commodities reversed after a U.S. storm caused less damage than originally feared, and gold is getting hit by the marginally more hawkish Fed and the perceived reduction in European political risk.
The point to note is that any of these assets has the potential to start rallying in isolation, which is a valid warning against trying to attribute a catch-all explanation for the commodities rout.
But even if the drivers are unique for each commodity, there are macro implications of this all occurring at once.
Global inflation will not sustainably rise while core input prices are tanking. That’s got a negative knock-on for financial markets sentiment. There’s genuine detrimental wealth effects, not to mention the message it’s sending about the state of global aggregate demand.
As a whole, the commodities selloff of the past two months is arguably the single largest macro factor shifting the view on how to play the months ahead. There are consequences for FX, rates, credit and equities markets.
Sometimes over-simplification of a complex issue can help you focus on the most important conclusions. That’s not to say there aren’t money-making opportunities for those who choose a more granular approach, but it doesn’t negate the validity of taking a macro view.