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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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Standard Chartered Blames Gamma Hedging For Overdue Oil Selloff

  • Standard Chartered: Gamma hedging has exacerbated the sell-off in oil futures.
  • A cross-section of commodity experts are saying that the oil price crash is an overreaction to the banking crisis and that the selloff is overdone.
  • Most experts believe that the banking crisis is not systemic nor indicative of a looming financial crisis

The energy sector has emerged as the worst performer among all 11 sectors of the U.S. market in the current week, with energy prices dropping sharply as a spate of bank failures reignited a wave of risk-off selling.

Oil prices have crashed spectacularly, with WTI crude falling from $80.46 per barrel just 10 days ago to the $67 range, while Brent has declined from $86.18 per barrel to the $73 range, levels they last touched in December 2021. On Friday, things improved slightly, with Brent moving into the $75 range and WTI testing $69. 

Commodity analysts at Standard Chartered warn that the oil price crash has been exacerbated by hedging activity–specifically, due to gamma hedging effects, with banks selling oil to manage their side of options as prices fall through the strike prices of oil producer put options and volatility increases. The negative price effect has been exacerbated because the main cliff-face of producer puts currently occupies a narrow price range. 

While gamma hedging effects did not cause the initial price fall, they have caused a short-term undershoot, further magnified by the closing out of associated less committed speculative longs. StanChart has worked out the distribution of producer puts based on a survey of 46 U.S. independent producers.

On a brighter note, StanChart’s proprietary bull-bear index rose 32.2 w/w to a mildly bullish +20.1, buoyed by declines in crude inventories (both nationally and at Cushing) relative to the five-year average as well as improvement in demand. The analysts have predicted that oil prices will recover as the global oil surplus dissipates. Related: U.S. Drilling Makes Gains As Gas Rig Count Jumps

Source: Standard Chartered

Selloff Overdone

A cross-section of commodity experts are saying that the oil price crash is an overreaction to the banking crisis and that the selloff is overdone. Michael Tran, managing director of global energy strategy at RBC Capital Markets, has told Bloomberg that the oil markets are reacting as if the economy is in a full-blown recession, “This is a (oil) market effectively trading as if the economy is already in a full blown recession. Everybody knows why oil prices are coming off. It’s not an oil market specific issue, it’s a broad macro issue,” he has stated.  

Tran sees oil prices climbing in the second half of this year amid China's economic reopening, and heightened demand coming from India. He also anticipates that oil prices will climb in the coming weeks and months once the panic settles within the markets.

The good news at this juncture is that most experts believe that the banking crisis is not systemic nor indicative of a looming financial crisis.

Whereas the U.S. government has ruled out a bailout for SVB, its Swiss peer has been more lucky after the troubled lender was offered a lifeline after the Swiss National Bank agreed to loan the struggling lender up to 50B francs ($54B). The bank also announced public tender offers by Credit Suisse International to repurchase certain OpCo senior debt securities for cash of up to ~3B francs. Previously, the Saudi National Bank, which owns almost 10% of Credit Suisse, declared that it would not provide further support to the group, days after the bank disclosed ‘material weakness’ in its financial statements just weeks after reporting a net loss of £6.6 billion for FY 2022.

As a Global Systemically Important Bank, the plight of Credit Suisse has been a much bigger concern for the global markets due to the sheer scale of its balance sheet and much bigger potential for contagion from the bank’s global reach. But the fact that shares of Credit Suisse and those of European banks have recovered swiftly suggests that the markets do not view the banking crisis as being systemic or likely to unravel on a wider scale. As UBS Wealth chief investment officer Mark Haefele has said, the swift action by the FDIC to guarantee deposits and by the Fed to lend to banks that require funds will solve liquidity-related risks for U.S. banks and also for the U.S. branches of foreign banks.

The broader market is also in a bullish mood.

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For the third straight week, investors have been net buyers of fund assets including exchange traded funds (ETFs) and traditional funds. For the seven-day period ending March 15, market participants pumped $88.4B of net capital into the fund market with money market funds taking in $108B. Interestingly, the SPDR S&P Regional Banking ETF (NYSEARCA:KRE) attracted the most significant cash at $1.4B, while SPDR Gold Trust (NYSEARCA:GLD) came in second after pulling in $501M.

By Alex Kimani for Oilprice.com

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Leave a comment
  • Mamdouh Salameh on March 20 2023 said:
    It is probably true that the recent crude oil price crash is an overreaction to fears of a banking collapse precipitating a global financial crisis. Both the global oil market and the global economy are adopting the attitude of ‘once bitten, twice shy’ and who can blame them particularly that the recent banking collapse started in the United States before it caused a serious plunge in the shares of Switzerland’s second biggest bank Credit Suisse causing fears that it might spread globally.

    Every single financial crisis from the 1929 Great Depression to the 2008 subprime financial crisis and from the 2014 oil price collapse and now the Silicon Valley bank collapse all started in the United States and then spread to the world.

    Is it then a mere coincidence that from the minute the US dollar became the reserve currency of the world in the aftermath of WW2 and later the global oil currency, the world started to face one financial crisis after another, sanctions became rampant and deficit financing became entrenched in the global financial system leading to unsustainable US debts and the collapse of the Gold Standard?

    Could the banking crisis be related to inherent structural weaknesses in the US economy and its banking system? or could it be the result of extreme hiking of interest rates by the Federal Reserve, a case of ‘the cure being worse than the disease’ or both?

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert
  • George Doolittle on March 20 2023 said:
    The USA needs to send coal to Newcastle England again? *NOT A PROBLEM.*

Leave a comment




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