‘Mug’s game’ for oil traders as market fails to shake off volatility
Doubt over demand for crude and ability to supply it is casting a long shadow, writes
There is little new year optimism for oil traders. On their return to the commodity desks of oil majors and hedge funds a market awaits in the throes of its deepest volatility in years.
It is now three years since an oversupply of oil brought global crude prices to its knees. Still, the market staggers under the weight of doubt over demand for crude and its ability to supply it. In the year ahead, souring geopolitical tensions and global economic fears will be heaped atop.
“This turn of the year feels a little different to us and for many reasons,” reads a letter from the heads of Jefferies to the US investment firm’s clients. “The foundation doesn’t feel as firm, the future doesn’t feel as certain and optimistic, and the path forward does not seem as clear.
“But unlike other turbulent periods, the reasons why are not obvious,” write Richard Handler and Brian Friedman, the chief executive and president respectively.
The influence of geopolitics on global markets threatens to untether oil prices from their foundations as a new breed of market player faces down a new type of market challenge.
“For a brief period the energy market in 2018 bore all the hallmarks of having stabilised with some sense of normalcy returning,” says Jon Rigby, of Swiss investment bank UBS. “But that all changed in October.”
In a month the oil market endured its steepest fall in over two years. Investor jitters over global economic growth, and its impact on future oil demand, dominated trading desks.
By the end of November, Brent crude prices had plunged by almost a third to the lowest in over a year. Even Opec’s promise to tighten oil taps in Midgley of S&P Global Platts. “In a high-volatility world the market fundamentals don’t always play out.” In his forecasts the wider economic market gloom may keep depressed oil prices from recovering in the months ahead, despite Opec’s best laid plans.
Lower oil prices, in turn, could keep US rigs from mushrooming across its shale heartlands as quickly as expected. This subtle shift away from supply-demand modelling may mean oil prices rise in late 2019 rather than drift lower.
Helima Croft, of RBC Capital Markets, believes the market has been increasingly distracted from the basic fundamentals of oil supply and demand for years.
“There is a problem in the market. It’s almost like a herd mentality meets attention deficit disorder,” she says. “It’s as though the market really only has time to focus on one story. It’s headline-driven.”
A knee-jerk market reaction has become more common as the main players have changed. In the wake of an exodus of trading houses and institutional investors from the commodity markets, hedge funds have played a bigger role in setting the tone. The growing influence of funds can itself fan the flames of a combustible market.
“Whereas physical traders are likely to make a long-term view, funds are trying to make money from volatility and short-term changes,” Midgley explains.
Turbulent Ups and downs
A rig drilling for Chevron in the Permian Basin near Midland, Texas, in the United States