‘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

The Sunday Telegraph - Money & Business - - Business -

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

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