The record level of oil shows that the market is increasingly led by Algos

(Bloomberg) — In recent weeks, speculators have bet against oil prices like never before.

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This is partly due to forecasts that increased production outside the OPEC+ alliance will create an oversupply of crude oil next year. Worries about a weakening global industrial complex are also weighing on the market, as evidenced by significant bets against diesel prices.

But the sheer size of the positions — oil recently had more bear bets than when OPEC began a price war at the start of the Covid pandemic — points to a deeper shift in the market. Investors holding oil to hedge against inflation have all but disappeared, and the bearish price outlook next year is scaring discretionary traders away from buying crude oil dips. Their withdrawal allowed commodity trading advisors — trend-following funds that trade largely on technical indicators — to gain even more prominence and build huge short bets.

“Net-short positions in oil are a big problem,” said Ilia Bouchouev, managing partner at Pentathlon Investments, who also teaches at New York University. “Several groups of market participants are now operating on lower sentiment.”

As central banks shift their focus from taming inflation to cutting rates to protect the economy, fund managers cut their allocations to commodities to the lowest in seven years, a Bank of America Corp survey showed. from September.

That exodus helped leave the positions of money managers such as hedge funds at their most bearish levels in data since 2011, in a combination of all major oil contracts. Those investors turned to Brent crude for the first time this month and continue to hold record net short bets on diesel futures and options.

With CTAs increasingly in the driver’s seat, there have been at least three cases in the past two months alone where these algorithmic traders have been credited with exacerbating moves in either direction, resulting in a price spike .

“It’s terrible. Nobody has conviction,” said Trevor Woods, chief investment officer of Northern Trace Capital, which uses mostly discretionary trading strategies.

The fundamental image for crude is a large part of the dangerousness. Globally, stocks are expected to rise, with supplies stored in OECD countries rising to about 2.73 billion barrels in 2025, according to a US government estimate.

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Demand in the fuel-making sector is also showing cracks as refiners in Europe cut processing rates and as profits from making fuels such as gasoline and diesel in the U.S. fall to their lowest levels since the pandemic on a seasonal basis.

However, extreme positioning increases the risk of a steep recovery, and the market is not without potential bullish catalysts such as recent supply disruptions in Libya, stimulus measures from China and aggressive rate cuts from the Federal Reserve. At the same time, US crude oil inventories fell to their lowest level since April 2022 last week.

“We remain structurally bearish, but there is discomfort that bearish views are now unanimous,” Macquarie analysts wrote in a note.

Some discretionary traders are also wary of taking significant positions ahead of the U.S. election, which could have a wide range of effects on the oil market, several traders said. This uncertainty, during what has already been a difficult year for many traders, further discourages them from buying oil anytime soon.

“It’s like a ghost town,” said Northern Trace’s Woods.

–With the assistance of Lucia Kassai.

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