Why Is Oil Selling Off? There’s Just Too Much of It

Any sharp oil sell-off, like the one this week, always has a clutch of plausible explanations and a sense that some sure-bet trade has unwound in a rout. And that’s almost certainly true. But there’s a far more prosaic force dragging on the market’s enthusiasm.

After Thursday’s plunge and a little more air leaking out as of early Friday morning, crude futures are trading about 7% below where they closed Wednesday. The narrative heading into this week was that OPEC+ discipline combined with accelerating recovery from Covid-19 and a dash of stimulus-inspired inflation would keep pushing oil prices higher. Money managers’ net length in the two biggest crude contracts combined was bobbing around its highest level since late 2018; speculative money had flowed in since the first successful vaccine tests were announced in early November. There was heady talk of a new “supercycle.”