Why Oil Could Be Headed for Heavy Short-Term Losses

Sudden spikes in crude prices tend to give way to declines in the short term

Senior Quantitative Analyst
Sep 18, 2019 at 7:09 AM
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Oil prices spiked over the weekend after drone attacks on oil facilities in Saudi Arabia. The price reverted some yesterday, though, after reports that oil production would be back to normal sooner than expected. I’ve gathered the data on how crude typically behaves after significant daily price shocks to see if there’s a high probability trade in these situations.

Oil Spikes Since 1985

Oil spot prices (looking at WTI crude oil on the NYMEX) surged more than 14% on Monday on worries about output after the attacks over the weekend. Since 1985, there have been 32 occasions where oil spiked 10% or more in a day. The table below shows the returns after these huge one-day spikes. The second table, for comparison, shows typical oil returns since 1985.

WTI crude generally pulls back the next day, just like yesterday, when the spot price fell about 3%. Oil averaged a decline of more than 1.5% the day after spikes and was positive just 34% of the time. Two weeks after the spike, black gold averaged a decline of nearly 5%. On average, it has tended to bottom out around that time; at a month after a spike, oil averages a smaller decline of 2%.

The rebounds have been strong after the initial underperformance. WTI has averaged a gain of about 8.5% three months after the 10% daily spikes, even though only half of the returns were positive. The outsized average gain after three months is due to the much bigger upside moves compared to downside moves.

Oil Spikes

When the Crude Spike Happens Out of Nowhere

Monday was the first double-digit spike in oil since early 2016. It’s rare for there to be such a long gap between big crude shocks. When you filter the data down to only the 10% spikes which were the first ones to occur in at least a year, you get eight occurrences. The table below summarizes the oil returns after these occurrences.

In these cases, WTI crude initially falls hard, down over 5% the next day. Then it continues to fall after that. A month after these out-of-nowhere spikes (the first 10% daily spike in at least a year), oil has averaged a double-digit loss, with only two of the eight returns positive. Three months after the spike, again, crude averages a loss of almost 12%.

First Oil Spikes Of Year

Historically speaking, oil price spikes like the one we saw on Monday tend to be followed by significant declines in the commodity over the short term. When it’s been the first oil spike in a long time, like this recent one, the declines were more severe and lasted longer, out to at least three months.


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