As numbers of Asian and US energy stocks turn red on Wall Street monitors early Thursday, oil traders are starting to wonder if a new record collapse is about to unfold once again.
All of a sudden, the stock market crash that caused major companies to tank just over a year ago is spreading an air of trepidation.
A massive sell-off across stock markets last October 2018 left global banks scrambling to cushion insurance policies like options contracts that they had issued to oil companies, triggering a new salvo of selling that eventually caused prices to plunge by over 40 percent to $49.94 per barrel.
Global oil standard Brent crude has dipped by as much as quarter to a one-year low of $53.85 per barrel. The critical border for a similar massive sell-off begins at around $50 a barrel for Brent, said Greg Newman, chief of Onyx Capital Group, a London-based oil market maker.
Although prices of crude so far have not been sparked by a New York selling, but rather by the plummet in China's oil demand, capitalists are on standby on the possibility of a wild selling run.
Similar scenarios in the past have caused a crucial financial sell-off: as prices fall beyond a specific level, banks desperately sell futures to manage their options portfolio. Those forces down prices and bring more options into the red zone, creating even more selling from Wall Street, which drags prices further down.
Even OPEC is wary about the repercussions that a so-called "negative gamma" event may cause. As the oil giant weighs on how to react to the retreat in prices, the possibility of a financially instigated sell-off is one element it is seriously analyzing, according to an OPEC executive, who asked for anonymity.
Top ministers of OPEC met in Austria on Wednesday to evaluate the oil market after West Texas Intermediate and Brent prices dropped to a new one-year low. The meeting, set to end Thursday, would be a major turning point for OPEC officials to decide whether to sound the alarm for an emergency meeting, or not.
Crude oil narrowly evaded bear market turf - defined as a 20 percent or more fall from a recent peak - Wednesday as it recovered from the lows of about $49.50 on Tuesday to reach the $51 mark.
There are a number of specific variations between the latest sell-off and what happened at the end of 2018, traders claim, for all the dangers at hand as oil prices drop.
Banks have sold options at a broader price range, minimizing the risk of a sudden sell-off caused by the downturn. To that end, if OPEC ministers can agree to further reduce production, it could result in a boost in crude oil prices.
