Will the selloff of oil trigger another tragedy?

During the beginning of the year, the massive selloff of the stock market triggered by the collapse of oil price was confusing. It is usually believed that lower energy price will provide benefits for transportation and industry production in the terms of lower cost. However, the stock market responded to it in the opposite way last time. Since the oil market is trading with margin mechanism, traders and investor need to provide maintenance margin while they are holding the future contracts. Without sufficient margin to maintain the positions of the oil future contract, the value of the investment will go to zero and investors will be kicked off by the clearing house. In order to hold the oil contract in the purpose to achieve a longer term return, some investors had to sell the equity position they hold and transfer this capital into the maintenance margin. That’s one of the explanation for the January market tragedy. People sell the equities and betted on the recovery of oil price.

This month, Oil prices are falling as a summer glut coupled fading demand keep pulling crude back from its strongest rally in years. For the oil price rally in the past several months, Canada fire and strikes in Nigeria together posted a promising cut in the supply. However, the report last month was unsatisfied. Shipping data showed Nigerian exports holding steady above 1.5 million barrels a day, according to data provider windward. Inventory of the oil around the world is not clear without the data from China and Russia. The concerns on the supply and demand put the end to the rally of oil price.

U.S. crude oil for September delivery recently fell 87 cents, or 2%, to $43.32 a barrel on the New York Mercantile Exchange. That price is within 30 cents of the lowest intraday level since April 26. Brent, the global benchmark, fell 77 cents, or 1.7%, to $44.92 a barrel on ICE Futures Europe.

The Joint Organizations Data Initiative gathers global storage data, but has no figures for Russia, China and other nations. These locations are soaking up more oil. Countries outside the Organization for Economic Cooperation and Development, an intergovernmental organization of 35 countries with market economies, now account for half of global demand, up from 41% a decade ago.

In addition, nations don’t report “floating storage,” or tankers anchored off their coasts, as in Singapore. The IEA said floating storage in June rose to 95 million barrels, the highest level since 2009.

In China, another storage mystery is unfolding. Government data show oil imports rising at a faster rate than refiners are processing it. The figures suggest the country built a surplus 160 million barrels during the first half of the year, enough to meet its oil needs for about two weeks.

This new round falling of oil price is likely to post new concerns to this vulnerable financial market after Brexit. The impacts from selling power in oil market is likely again to make the most serious impact on the financial market. Fed will also release the result on rate hike this Wednesday and the market is waiting for the explanations of several economy data.  

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