"Extreme Demand Pessimism" Said To Drive Thursday's Massive Oil Sell-Off

But get set for a huge rally soon, says StanChart: File Image/Pixabay

Oil prices on Thursday tumbled by around 5 percent as data from the U.S. and China caused demand worries to kick into overdrive within the investment community.

Brent settled down $3.76, or 4.6 percent, to $77.42 per barrel, while West Texas Intermediate settled down $3.76, or 4.9 percent, to $72.90. 

The triggers for the massive selloff included data from Washington showing that the number of Americans filing new claims for unemployment benefits increased to a three-month high last week, plus retail sales falling for the first time in seven months in October with consumers spending less on automobiles and hobbies.

Traders were also spooked by an expected slowdown in Chinese oil refinery throughput, even though economic news from that country was upbeat: industrial output increased at a faster pace and retail sales growth beat expectations in October.

The trading mindset was baffling to some observers, given that the U.S. news further strengthened expectations the Federal Reserve is finished hiking interest rates.

As someone who has repeatedly pointed out that the oil losses tend to be overdone, Phil Flynn, senior market analyst at Price Futures Group Inc., said of Thursday's trading behaviour, "The mood is negative, the charts are negative; it's going to take something to change that mood, and until then people will ride it down until they realize it's overdone."

Daniel Ghali, senior commodity strategist at TD Securities, predicted that the average commodity trading advisor would likely have liquidated most of their long positioning by the end of Thursday's session and singled them out for "contributing to the pain" of the selloff.

For its part, StanChart noted that the current oil price weakness – the outcome of "extreme demand pessimism" – was a significant undershoot and a big rally comparable to the May bull run may soon occur.

In other oil news on Thursday, Washington announced it will enforce sanctions on more than 1 million barrels per day (bpd) of oil exports from Hamas supporter Iran as the Israel/Hamas conflict rages on in the Middle East.

Also, figures from the Joint Organizations Data Initiative showed that Saudi Arabia's crude oil exports increased by 170,000 bpd to 5.75 million bpd in September, compared to a 28 month low in August when the kingdom shipped 5.58 million bpd.