Oil – feeling the squeeze

A volatile start to the week for oil prices. Brent futures opened up on Monday under pressure, down 2% from Friday’s close.

Oil prices saw a dramatic turnaround by mid-morning on Monday after the Saudi Oil and Minerals Minster was reported saying that Saudi Arabia would co-operate with both OPEC, and non-OPEC countries to stabilise oil prices.

The reaction was as drastic as it was instant, with Brent futures seeing a 3% turn around with a matter of minutes. This highlighted more than anything the fear in the market to the response of higher prices.

What does this mean?

Fundamentally, that oil consumption is dropping at a time when production has been increasing. This has resulted in oil traders betting heavily on lower prices with large short positions in the futures market. This is only good for traders as long as the market remain stable in its downward trend.

The downing of a Russian jet by Turkey over disputed airspace on Tuesday morning will have done nothing but fuel Middle Eastern tensions, in the process raising the stakes for oil shorts one notch higher.

Oil fundamentals may not be changing, but risk appetite will be. Heavy shorts at this point will be trying to analyse how Putin will react, and what effect this will have on the market. The reality is that this cannot be second-guessed, so becomes a game changer to futures shorts.

Look for higher prices over the coming weeks as traders start to close their short futures positions. Fundamentally the market may remain weak, but this will not be enough to keep those positions open.