Goldman Sachs says the move lower in oil has been “exacerbated by capitulation flows and negative gamma effects”
- Negative gamma effects are when swap dealers increasingly need to sell futures to hedge the oil price risk taken on by selling put options to producers.
- The lack of discretionary buying activity in the face of an uncertain new COVID variant has therefore left prices in free-fall and pricing in a dire demand outlook.
On the demand outlook GS say:
- this would represent any of these extreme outcomes: (1) not a single plane flying around the world for three months, or (2) half as intense as the 2020 global lockdown, or (3) a world even worst-off than before vaccinations: the combination of global jet demand falling to last winter’s level (-1 mb/d), a twice as large hit to EU demand as the Alpha variant last winter (-2 mb/d) and twice as large a hit to Chinese demand as the Delta variant this summer (-1 mb/d).
- We continue to view these as an excessive repricing
- Given the large uncertainties at this time, we await further news on the variant’s development and additional restrictions imposed before refreshing our supply and demand balances and oil price forecasts, although again reiterate our view that the market has far overshot the likely impact of the latest variant on oil demand with the structural repricing higher due to the dramatic change in the oil supply reaction function still ahead of us.
Bolding is mine.