Commodity Roundup: UBS sees near-term oil market volatility after sell-off

Oil prices were little changed on Wednesday, following a steep fall on the back of OPEC+ plans to begin phasing out voluntary cuts in the fourth quarter, while gold prices held steady against a firmer dollar.

Crude oil is down 5% since last Friday, after registering two consecutive weekly and monthly losses.

“While some blame the OPEC+ meeting for the drop, we believe other factors—such as the option market—have played a role,” said UBS analyst Giovanni Staunovo, adding, prices are likely to remain volatile in the near term.

Staunovo notes, renewed inventory draws are needed to push oil prices higher. UBS expects oil supply growth to lag demand growth over the coming months, and has retained a positive outlook for crude prices.

“We don’t know what initiated the sell-off, but the break below $80/bbl in Brent likely amplified the price decline via the options market, through so-called negative gamma,” he added.

According to the investment bank, financial institutions sold downside protection instruments (put options) to oil market players, for instance oil producers. With price falling below the level where the protection kicks in, those financial institutions “now need to avoid having a price risk on their balance sheets. So they likely sold crude futures to offset the risks, amplifying the rout,” it added.

Elsewhere in the precious metals market, gold, silver and palladium ticked up, but gains were capped by a stronger dollar. Investors now look forward to further economic clues following softer-than-expected economic data, that cemented bets for Fed rate cuts this year.

Meanwhile, LME copper prices settled almost 2% lower yesterday, taking prices back below $10,000/t. Analysts at ING said, short-term fundamentals have not supported the scale of the speculative-driven move higher in copper over much of May. “Indicators in China have been bearish,” they said, adding, LME copper inventories have moved higher recently, growing by almost 16kt since mid-May to just shy of 119kt.

Recent Commodity Price Movements and A look At Some ETFs