Crude oil futures were trading higher Monday morning, but several
factors suggest that a further correction is possible after sharp falls
last week.
At 0947 GMT, the April Brent contract on London's ICE futures
exchange was at $114.95 a barrel, up 85 cents, or 0.7%. Nymex light,
sweet crude for April delivery was up 53 cents, or 0.6%, at $93.66 a
barrel.
The April contract opened last week at $117.81 a barrel but
fell to a low of $113.32 a barrel Thursday, before rising somewhat to
settle at a weekly loss of 3.1%.
"The recent price drop came on the back of what we would see
as a deflation of a rally that was driven more by speculative forces
than by market fundamentals themselves," wrote analysts from JBC Energy
in a note.
Increased volatility in both London and New York crude futures
markets suggests that both contracts are heading towards a further
downward correction, according to the Schork Report.
"[I]f you buy into the notion that implied volatility falls in
bullish markets (on the assumption bull markets are less risky than
bear markets) than the current run in option valuations is a
concern...bottom line, just like we said for New York, the market in
London looks vulnerable to corrective weakness," the report said.
Implied volatility--which measures the relationship between
the underlying price of a commodity and an option to purchase it--rose
by 35% last week. Schork said that market sentiment was still bullish,
however, and that any change to that status was awaiting confirmation
from this week's price movements.
In the U.S., money managers have cut their net long positions
in WTI crude, implying that they also believe price fall to be on the
way. Investors take long positions, buying into a commodity, when they
expect its price to go up and are more likely to take short positions if
they believe that the price will fall.
Equivalent data for U.K. managers is due later Monday.
A boost to the markets is possible on Tuesday, however,
depending on the outcome of a scheduled meeting between Iran and the
P5+1 countries--China, France, Russia, the U.K., the U.S and Germany.
The meeting, to be held in Kazakhstan, will hope to make progress on negotiations over sanctions placed on Iran's oil exports.
The sanctions, which were put in place as a check on Iran's
nuclear program, have cut the country's production to their lowest level
in 30 years, according to the International Energy Agency.
At 0948 GMT, the ICE's gasoil contract for March delivery was
up $10.75, or 1.1%, at $988.50 per metric ton, while Nymex gasoline for
March delivery was up 439 points, or 1.4%, at $3.1235 per gallon.