Standard Chartered blames Gamma Hedging for overdue oil sell-off

The energy sector has emerged as the worst performer of all 11 sectors in the US market for the week-to-date, with energy prices falling sharply as a spate of bank failures reignited a wave of risk-off selling.

Oil prices have plummeted spectacularly, with WTI crude falling to $67 from $80.46 a barrel just 10 days ago, while Brent has fallen to $73 from $86.18 a barrel, a level last seen in December have reached 2021. Conditions improved slightly on Friday with Brent moving into the $75 area and WTI testing $69.

Commodity analysts at Standard Chartered warn that the oil price crash has been exacerbated by hedging activity, particularly due to gamma hedging effects, with banks selling oil to manage their options side when prices are driven by put option strike prices and Oil producer volatility fall increases. The negative price effect was amplified as the main cliff of producer puts currently occupies a narrow price range.

While gamma hedging effects did not cause the initial price pullback, they did create a short-term undershoot that was further compounded by the closure of associated less-committed speculative long positions. StanChart determined the distribution of producer puts based on a survey of 46 independent US producers.

On a positive note, StanChart’s proprietary Bull Bear Index is up 32.2 w/w to a mildly bullish +20.1, prompted by the decline in crude oil inventories (both nationally and in Cushing) compared to the five-year average and fueled an improvement in demand. Analysts have predicted that oil prices will recover as the global oil surplus dissipates. Also Read: US Drilling Gains as Gas Rig Count Rises

Source: Standard Chartered

Sale exaggerated

A cross-section of commodities experts say the oil price crash was an overreaction to the banking crisis and the sell-off was overdone. Michael Tran, managing director of global energy strategy at RBC Capital Markets, told Bloomberg that oil markets are reacting as if the economy were in a full-blown recession.This is an (oil) market that is effectively trading as if the economy is already in a full-blown recession. Everyone knows why oil prices are falling. It’s not an oil market specific problem, it’s a general macro problem,he explained.

Tran expects oil prices to rise in the second half of this year on China’s economic reopening and increased demand from India. He also expects oil prices to rise in the coming weeks and months once the panic in the markets subsides.

The good news here is that most experts believe that the banking crisis is neither systemic nor indicative of an impending financial crisis.

While the US government has ruled out a bailout for SVB, its Swiss competitor had better luck after the troubled lender was offered the bailout Swiss National Bank agreed to lend up to CHF 50 billion (US$ 54 billion) to the troubled lender. The bank also announced public takeover bids Credit Suisse International repurchase certain senior debt of OpCo for cash of up to CHF 3 billion. earlier the Saudi National Bankwhich owns almost 10% of Credit Suisse, said it would no longer support the group days after the bank revealed “material weakness” in its financial statements just weeks after reporting a net loss of £6.6 billion for FY2022 had disclosed.

As a global systemically important bank, Credit Suisse’s plight on global markets was a much bigger concern for global markets due to the sheer size of its balance sheet and the much greater potential for contagion from the bank’s global reach. However, the fact that Credit Suisse and European bank stocks have rallied quickly suggests that markets do not view the banking crisis as systemic or as likely to unfold on a larger scale. As Mark Haefele, chief investment officer of UBS Wealth, said, the rapid action of the FDIC to guarantee deposits and the Fed to lend to banks that need funds will solve liquidity risks for US banks and also for the US branches of foreign banks .

The broader market is also bullish.

For the third straight week, investors were net buyers of fund assets, including exchange-traded funds (ETFs) and traditional funds. In the seven days ended March 15, market participants injected $88.4 billion in net capital into the fund market, with money market funds taking in $108 billion. Interestingly the SPDR S&P Regional Banking ETF (NYSEARCA:KRE) attracted $1.4 billion in cash, while SPDR Gold Trust (NYSEARCA:GLD) finished second after raising $501 million.

By Alex Kimani for

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