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Transient Weakness in Oil Prices
Transient Weakness in Oil Prices Oil prices fell sharply last week after OPEC decided not to cut production. While members of the oil cartel acknowledged that prices will remain weak unless production is curtailed, OPEC is not willing to bear the burden of such a decision alone.
We remain positive on oil in the long-term, but believe oil prices will remain under pressure until production is reduced.
WTI crude and Brent are now trading over 30% below the US$100/bbl level that is considered a “fair price” by most OPEC producers and that has historically been defended by OPEC. While weak global demand for oil and distillates combined with ample global supply of crude has weighed on both Brent and WTI prices over the past few months, OPEC inaction contributed to push oil prices below US$70/bbl.
Although OPEC resisted calls to cut production last week, highlighting the need for oil prices to find a new equilibrium, we believe the cartel will eventually have to reduce supply to help stabilise global oil prices. The cartel jointly produces approximately 40% of global oil output. While the US is gaining an increasing share of global output (by displacing oil imports through its own production) and Russia remains a formidable player, we believe it is too early to write off OPEC as an irrelevant cartel when it comes to setting global prices.
Key in the decision not to cut production was the split between OPEC and non-OPEC producers. Over the past few years, non- OPEC countries, particularly the US, have seen the majority of the growth in oil production, progressively taking market share away from OPEC countries. With the US not likely to cut its shale production at this stage, OPEC members are unwilling to take the burden alone.
OPEC has historically played a fundamental role in keeping oil prices above US$100/bbl but shale oil might have changed the shape of the industry permanently. Oil productivity and costs vary considerably across different shale formations (see chart opposite), with striking variances within areas of the same formation. While the marginal cost of production of oil as measured by the 90th percentile of the cost curve of the 50 largest oil and gas companies was estimated to be around US$92/bbl in 2011 (see chart on page 2), shale oil has become increasingly cheaper to produce. The IEA reckons 82% of crude oil and condensates production from the United States is still profitable at a price of US$60/bbl or lower
However, the majority of OPEC countries are estimated to require oil prices of at least US$90-US$100/barrel to balance their government budgets. While these countries can run budget deficits, the appetite to do so will wear thin as the cost of financing starts to increase. We believe that last week’s inaction increases the need for large cut at the June 2015 OPEC meeting.
Although price weakness is likely to continue through the first half of 2015, continued growth from the US and China, combined with a reduction in oil supply, will eventually bring the oil market back to balance with prices returning to trade around the US$90/bbl level. In the meanwhile, we deem appropriate to revise down our short/medium-term targets for WTI and Brent from US$105/bbl to US$70/bbl and from US$110/bbl to US$75/bbl as OPEC’s decision of not cutting production will continue to put pressure on prices. Once we start to see production cuts we expect WTI to move towards US$90/bbl and Brent towards US$95/bbl.
IMPORTANT INFORMATION
This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited (“ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (“FCA”).
During and after the US market close on Friday, cryptocurrency markets experienced their largest liquidation event on record, with an estimated USD 19 billion in leveraged positions unwound across futures and perpetual swap markets.
What Happened
The selloff began following President Trump’s announcement of an additional 100% tariff on Chinese imports, a move that triggered a sharp risk-off reaction across global markets. U.S. equities had their worst session since April, and with traditional markets closed for the weekend, crypto became the only major market still open for price discovery.
Nearly 90% of liquidations were long positions, underscoring how leveraged bullish sentiment had become across digital assets.
By asset:
• Bitcoin (BTC) saw over $5 billion in positions liquidated, falling roughly 12.5% intraday, from highs of ~$122,600 to lows near $107,000.
• Ethereum (ETH) recorded around $4 billion in liquidations, declining more than 20% from $4,400 to ~$3,500.
• Solana (SOL) experienced $1.8 billion in liquidations and dropped as much as 22% before recovering some ground.
While Bitcoin’s percentage price decline is in line with historical shocks, and only took the price back to where it was two weeks ago, it was a three-standard deviation move vs the past three years during which the asset saw broader institutional adoption. Moreover, the episode represents the largest forced liquidation event in crypto’s history in both size and concentration of long positions.
Liquidity Dynamics: The Perfect Storm
The scale of the move was amplified by fragile liquidity across both spot and derivatives markets. Order books were thin heading into the weekend, leaving markets especially vulnerable to shocks.
The timing compounded the impact:
• The announcement hit just after the U.S. cash equity close and before a long weekend (Columbus Day), when liquidity naturally declines.
• With most global asset classes offline, crypto became the only outlet for risk repricing.
• As liquidity thinned, automated liquidations triggered a domino effect across exchanges.
Funding rates flipped sharply negative—particularly in Solana—signaling an abrupt pivot from leveraged longs to short positioning. In some altcoins, liquidity deteriorated so severely that price wicks reached near-zero levels before stabilizing.
Complicating matters, several major exchanges experienced infrastructure strain as trading volumes surged over 140% to ~$180 billion in a matter of hours. APIs froze, oracles glitched, and order books briefly went dark. This led to mispriced liquidations and system-wide stress, highlighting again that crypto’s operational fragility often lies not in blockchains themselves, but in the centralized trading infrastructure that sits around them.
What We’re Hearing from the Market
Market participants describe Friday’s events as a systemic deleveraging that caught even sophisticated funds off guard. Several leveraged traders and funds reportedly suffered heavy losses, and rumors persist of at least one major market maker being forced to unwind positions.
Some internal exchange estimates suggest total liquidations—including unreported DeFi exposures—could approach USD 30 billion once weekend trading is fully accounted for.
Volatility spiked dramatically, with Bitcoin implied volatility reaching levels not seen since the FTX collapse. While unsettling, such spikes are often short-lived and tend to normalize as market depth recovers.
Source: Glassnode
Looking Ahead
Despite the record size of liquidations, the price impact was moderate by historical standards, with Bitcoin’s drawdown smaller than those seen during prior major deleveraging events. Markets had been trading at all-time highs just days earlier, so a correction of this magnitude is not entirely unexpected.
So far, crypto markets appear to be stabilizing, though volumes remain light and sentiment cautious.
Key areas we’re watching in the near term include:
• Asian equity and futures markets as they reopen Monday, which may influence crypto sentiment.
• CME futures basis and funding rates as indicators of capital flows and arbitrage activity.
• Ethereum staking queues, which could become further stretched if the selloff continues.
Historically, large-scale liquidation events have been followed by periods of consolidation lasting one to two months before recovery. The previous two major liquidation cycles saw drawdowns of 19–24% over ~60 days, with full recovery typically taking three to five months.
Currently, Bitcoin funding rates remain within normal ranges, suggesting arbitrage desks continue to operate efficiently. However, with Solana’s funding still deeply negative, we could see a short squeeze if sentiment turns and liquidity returns.
Our View
While last week’s events highlight ongoing structural fragilities—particularly in leverage and centralized infrastructure—they also demonstrate that core blockchain networks remained resilient throughout.
For investors, this underscores the value of crypto exposure via regulated, physically backed ETPs over leveraged trading venues, where forced liquidations and operational risks can amplify volatility.
Overall, we view the selloff as a healthy, if painful, reset of speculative excess. As macro uncertainty persists, disciplined position sizing and diversification across regulated products remain key.
Research Newsletter
Each week the 21Shares Research team will publish our data-driven insights into the crypto asset world through this newsletter. Please direct any comments, questions, and words of feedback to research@21shares.com
Disclaimer
The information provided does not constitute a prospectus or other offering material and does not contain or constitute an offer to sell or a solicitation of any offer to buy securities in any jurisdiction. Some of the information published herein may contain forward-looking statements. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially from those in the forward-looking statements as a result of various factors. The information contained herein may not be considered as economic, legal, tax or other advice and users are cautioned to base investment decisions or other decisions solely on the content hereof.
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