Panic was palpable across Singapore on Tuesday. Like traders in any other market, oil dealers were in early. Most rushed in as soon as news spread, mostly by word of mouth and SMS, that oil prices had overnight crashed by 7% in value. Underlying the panic, and when you really ask people about what is going on, something more disturbing is happening. You can see that people are losing faith in the ability of free markets to deliver what we all look to the markets to give: a clear and rational valuation.
The rush to square books -- and in particular to undo long positions -- was obvious. As it happened, I spent most of the morning in what should have been a straight-forward meeting with one Singapore trading team. The meeting was constantly being interrupted by brokers calling in with offers to sell anything -- outright prices, time spreads, crack spreads.
As one cell phone after another buzzed around the table, it was pretty clear that there were no buyers anywhere in the island's panicked trading community. Selling October/November at minus $7.50/mt. No deal? Two minutes later, selling minus $7.75. Now can? Apparently not... and the calls kept coming, bouncing from one cell phone to the next.
The distress extends beyond paid, professional traders who make a living by taking on these kinds of risks, and this is where deeper damage is being done to confidence in the markets.
Ordinary people woke up in Singapore Tuesday to front-page news that household electricity prices will rise, on average, by 21% from Wednesday. The regulator blamed an historic rise in fuel oil prices, which are used as a basis for pricing electricity. And at the same time the general public saw on the news that oil markets were hit by the singe biggest fall ever overnight. Confused? That would be an understatement for most people I ran into this morning. Angry might be a more accurate adjective, particularly for my taxi driver.
On the world stage, the past week has brought the single biggest surge in oil prices ever seen -- when the October WTI futures contract rallied at one point by more than $30 last Monday -- and the single greatest drop of all time, when prices fell by more than $10 yesterday, barely a week later.
Putting aside the October contract expiry, it is reasonable to ask: how is it that crude oil could be worth as much as $130/barrel last Monday, and "only" $96/barrel today. Will oil be worth "only" $67 in a few months from now? It certainly could be. But what rational force is behind such movements?
The excessive volatility has been seen in every commodity market this year, and even traders are voting with their feet. Trading volume across the barrel, and around the world, are down by at least 30-40% for most markets, especially those that are traded outside of exchanges.
The damage done to the markets, whether you measure it as liquidity, public confidence, or simply risk itself, has been massive this summer. It might take many years for broad, Reagan-esque faith in markets to be restored.
I lost faith in the ability of the markets to provide a clear and rational valuation of crude oil when it surged past $125 in spite of Oil company execs saying that $70 was more realistic, and OPEC saying that it was speculators, and a hedge fund manager saying it was hedge funds. If enough people say oil is worth $200 then lots of people will pile into the market and it make it a self fulfilling prophecy. The human herd instinct is now working in reverse and those who are long on oil will get trampled. The same strikes are going on in Nigeria,refineries are still going off line, the US oil reserves are still dropping and all those seemingly inconsequential but normal occurences that were used as a reason to drive up oil prices are still happening but the herd is no longer listening to anything than the hoofbeats behind them.
Welcome to the end of the Commodity Super Cycle! Maybe the next time someone will say "But this time it's different". Wait for the stories to appear about the fortunes lost by speculators.