Standard Chartered blames Gamma Hedging for overdue oil sell-off

The energy sector has been the worst performer of all 11 sectors of the US market over the past week, with energy prices falling sharply on a spate of bank failures sparking a wave of risk selling.

Oil prices have fallen spectacularly, with WTI crude falling from $80.46 a barrel just 10 days ago to $67, while Brent fell from $86.18 a barrel to $73, levels they last reached in December 2021. On Friday, the situation improved slightly, with Brent heading 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, where banks sell oil to manage their side of options as prices fall on put option strikes from oil producers and volatility increases. The negative price effect is exacerbated as the main rock face of producers’ wells currently occupies a narrow price range.

While gamma hedging effects were not the cause of the initial price decline, they caused an undercut in the short term, which was further amplified by the closing of associated less committed speculative long positions. StanChart worked out the distribution of producer puts based on a survey of 46 American independent producers.

On a more positive note, StanChart’s own bull-bear index rose 32.2 w/w to a mildly bullish +20.1, supported by declines in crude oil inventories (both nationally and at Cushing’s) from its five-year average and an improvement in demand. The analysts predict that oil prices will recover as the global oil surplus fades. Related: Drilling in the US makes gains as the number of gas installations rises

Source: Standard Chartered

Exaggerated sale

A cross-section of commodity experts say the oil price crash is an overreaction to the banking crisis and the sell-off is overblown. Michael Tran, general manager of global energy strategy at RBC Capital Markets, told Bloomberg that the oil markets are reacting as if the economy is in a full-blown recession.This is an (oil) market that acts as if the economy is already in a full recession. Everyone knows why oil prices are falling. It’s not a specific problem for the oil market, it’s a broad macro problem.he has stated.

Tran sees oil prices rise in the second half of this year amid 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 has subsided.

The good news at the moment is that most experts believe that the banking crisis is not systemic and does not indicate an imminent financial crisis.

While the US government has ruled out a bailout for SVB, its Swiss counterpart has had better luck after the troubled lender was offered a bailout after the Swiss National Bank agreed to lend the struggling lender up to 50 billion francs ($54 billion). The bank also announced public takeover bids of Credit Suisse International to buy back certain OpCo senior debt securities for cash of up to ~3 billion francs. Formerly the Saudi National Bankwhich owns nearly 10% of Credit Suisse, declared it would not lend the group any further aid, days after the bank disclosed a “material weakness” in its financial statements, just weeks after reporting a net loss of £6.6bn for FY 2022 .

As a globally systemically important bank, Credit Suisse’s plight has been of much greater concern to global markets due to the sheer scale of its balance sheet and the much greater potential for contagion from the bank’s global reach. But the fact that shares of Credit Suisse and European banks have recovered quickly suggests that markets do not see the banking crisis as systemic or likely to unravel on a larger scale. As UBS Wealth chief investment officer Mark Haefele has said, the rapid action by the FDIC to guarantee deposits and by the Fed to provide loans to banks in need of money will increase liquidity-related risks for US banks and also for the US branches of foreign companies. solving banks.

The broader market is also optimistic.

For the third week in a row, investors were net buyers of fund assets, including Exchange Traded Funds (ETFs) and traditional funds. During the seven-day period ending March 15, market participants pumped $88.4 billion in net capital into the fund market, with money market funds raking in $108 billion. Interestingly, the SPDR S&P Regional Banking ETF (NYSEARCA:KRE) raised the most money at $1.4 billion SPDR Gold Trust (NYSEARCA:GLD) came in second after raising $501 million.

By Alex Kimani for

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