John Kemp, a Reuters market analyst, writes about the recent big moves in the commodity markets:
Like other humans, market participants and journalists are programmed by evolution to search for patterns and causations to help make sense of the chaotic and often arbitrary nature of events.Elsewhere, he adds:
It will be entertaining to read the thousands of gallons of ink spilled over the next couple of days as journalists and analysts try to rationalise the sudden turn around and identify that one or few factors that were the “tipping point.”
In reality, commodity prices and other assets rise because investors and hedgers anticipate further gains. The market needs a steady stream of net buying orders to keep rising. But at some point the risk of a setback outweighs the prospect of further gains. Long liquidation offsets fresh buying orders, and the process heads into reverse as the length cascades out of the market.
Given the powerful role of expectations and sentiment in building and sustaining coalitions of long (or on occasion short) investors and hedgers, there does not really have to be a rational cause for the market to turn on its tail, if by rational we are looking for a trigger that seems proportionate to the effect caused.
In the current bull market, spot Brent prices peaked some weeks ago and have been struggling to advance further. Similar loss of momentum can be seen in a range of markets, including copper.
The real reason for the current bout of commodity market liquidation is no more than prices had stopped going up. There seem few reasons to remain long and better reasons to lock in profits and wait until the future direction becomes clearer.
Since 1990, the standard deviation of daily price changes in front-month Brent crude (LCOc1) has been 1.64% (ignoring signs). Today’s current change is 6.1% (at time of writing) That is approximately 3.72 standard deviations IF price movements were normally distributed (which we know they are not), price movements should be within 1 standard deviation about 66% of the time, 2 standard deviations 95% of the time, 3 standard deviations about 99.7% of the time, and 4 standard deviations 99.99% of the timeThe Financial Times, where I got that, offers these graphs:
Oil fell some more in trading in Europe and Asia today: