The Gas Sell-Off – Speculators or Fundamentals?

Wednesday’s dramatic price action in the commodities marketsparked a debate over whether the losses were driven by fundamentals or traders getting into trouble as CME Group implemented margin calls in the gasoline market, as it had done a week earlier with silver.


In a note to clients, Barclays Capital outlined a series of fundamental reasons for Wednesday’s losses.

“Data published overnight by the US DoE showed that oil inventories in the US rose more than expected bringing inventories to the highest level since May 2009,” Yingxi Yu, a commodities analyst at Barclays Capital in London, wrote.

“Gasoline imports surprised to the upside, while production also rose despite concerns about weather-related supply disruptions,” Yu added.

“More importantly, despite the latest build, gasoline stocks are still 3.7 million barrels below the five-year average, which in itself does not constitute a bearish scenario big enough to bring about the 7.6 percent fall in prices yesterday,” he said.

“Instead, it appears that the market was perhaps a bit overextended on concerns about the impact of floods on refinery production, which remains a major source of uncertainty in coming weeks,” Yu added.

Fed-Related Risk-off Trading?

Others though believe the recent losses for commodities indicate the market is spooked by the prospect of higher rates and the end of quantitative easing by the Federal Reserve.

“Every risk asset on earth is linked to the Fed’s balance sheet,” said Philippa Malmgren from Principalis Asset Management in an interview with CNBC on Thursday.

“There have been two drivers of the recent volatility, supply side shocks and the prospect of the Fed tightening,” said Malmgren, who worked as an advisor to the White House during George W.Bush's term.

“Hence the dollar is higher while risky assets fall, the commodities sell-off will be horrifying, but not as bad as 2008,” she said.

The big question is who have been the big losers amid the commodity volatility.

Societe Generale analysts estimate that the hedge fund industry was net long crude oil on May 3 and “net selling of gas had diminished strongly.” Who got out in time will be watched closely on the trading floors over the coming days and weeks.