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Oil Up? Oil Down? Blame the Algorithms

When energy analysts and investors couldn’t figure out oil markets this year, they blamed one group: algorithmic traders.
On various days over the first six months of 2017, even amid signs of tightening supply, oil prices fell sharply, eventually sinking into bear market territory.
Such moves confounded longtime watchers of oil, who said that based on the fundamental information, prices should have been rising.
Oil investors, who make bets relying on data like production and demand, say that such forces are no longer always driving crude. They argue that program trading is distorting the market, often causing shallow price drops to snowball.
Take May 25. Even after the Organization of the Petroleum Exporting Countries agreed to continue cutting back supply, oil fell almost 5%.
While some observers attributed the move to investor expectations for deeper cuts from OPEC, others said the drop steepened as algorithms hopped on the trend. To fundamental oil investors, it was an example of how algorithmic trading and technical signs have been influencing commodities like never before.
Saudi Arabia energy minister Khalid al-Falih was among those who pointed to technical trading for causing the May 25 selloff to intensify. “For many people, it was time to sell,” he said in an interview after the May 25 OPEC meeting. “Once you broke some of the technical barriers,” that also had an impact, he said.
Although automated trading has swept stock and bond markets for years, it has only recently accounted for the majority of trades in energy.
Automated trading in energy-related contracts accounted for 58% of volume in the period from 2014 to 2016, compared with 47% from 2012 to 2014, a March study by the Commodity Futures Trading Commission shows.
Weekly data releases on U.S. crude storage are still a significant factor in market movement, but price swings have been magnified by programmed trading, analysts say.
On March 8 and 9, analysts say algorithms kicked in after data showed record-high inventory levels. Oil slid that day below $50 a barrel for the first time this year.
“An increasing number of market participants are being swayed more by the headlines than by counting physical barrels,” said Michael Tran, director of energy strategy at RBC Capital Markets. “A lot of this has been driven by algos and quants.”
Strategies vary greatly among funds, making the impact of algorithms and automation difficult to quantify. The complexity of algorithms also make them an easy and misguided target for blame, said Michael Pomada, chief executive of Crabel Capital Management, a hedge fund with $2.2 billion in assets and $700 million in trend-following strategies.
“It’s like the boogeyman,” said Mr. Pomada. “People tend to blame things that they don’t know much about.”
Algorithms often have intricate and opaque methodology. They tend to follow set rules on when to buy and sell, using signals such as moving averages and volatility to identify trends. But traders may combine mathematical models and human discretion to place bets on price moves ranging from within one day to several months.
Although both human traders and algorithms use automation to execute orders, the rising level of automated trades is one benchmark that reflects the growing influence and speed of computers in oil trading.
Computerized trading is also taking over other commodities. According to the CFTC report, the share of automated trading in agriculture rose to 49% between 2014 and 2016 from 38% between 2012 and 2014, and to 54% from 47% in metals over the same periods.
But crude has been particularly vulnerable to big swings this year as traders try to gauge the impact of OPEC cuts amid a global oil gut. Meanwhile, momentum traders who use algorithms have grasped for market trends, said Peter Hahn, of Bridgeton Research Group, a quantitative research firm.
Oil is “in a transitioning period,” Mr. Hahn said. In that kind of market, “momentum-based algorithms are more likely to be whipped into and out of long and short positions.”
Money is also pouring into some algorithmic strategies. In 2016, investors pumped $25.5 billion of new money into commodity trading advisors, or CTAs—many of which use algorithms to follow trends in the futures market—according to data provider Preqin. CTAs attracted another $7.2 billion of new investor cash in the first quarter of this year, bringing total assets to $256 billion.
Funds that use trend-following strategies say it’s unlikely their models have been disrupting the market. Traditional funds that don’t specialize in systematic trading or commodities can also be trend followers.
“There can be a lot of momentum players out there of all different types,“ said Christopher Reeve, director of product management at Aspect Capital, a CTA that uses trend-following strategies and manages more than $6 billion. “We would see very quickly if we were having too high of a market impact.”
Goldman Sachs said CTAs can create trading opportunities. “Fundamental traders shouldn’t be afraid of the CTAs, but rather view them as creating opportunities when they push markets away from fundamentals,” the firm wrote in a commodities research report from June 29.
Even traders that take positions based on fundamental signs are building models to predict how trend-followers can move oil, said Anthony Caruso, head of quantitative and macro strategies at Mesirow Advanced Strategies, a fund of hedge funds.
“They know that trend-followers are kind of the elephant in the room,” he said.

4 Comments on "Oil Up? Oil Down? Blame the Algorithms"

  1. bobinget on Tue, 11th Jul 2017 6:21 pm 

    It all depends on who is doing the programing.

    I put it to you, selling off SPR in a vein attempt to
    mimic some sort of ‘glut’, is getting really old.

    INSTEAD of studying inventories night and day, let’s look at CONSUMPTION harder..

    If your interested, we are near record use levels. For gasoline, diesel and jet fuel.

    Sorry, this tweet is a re-post

    #Gasoline demand only needs to increase by +0.117 mbpd to surpass our record high set back in wk end 5/26/17 @ 9.822 mbpd #OOT

    IOW’s, Wednesday’s EIA report may show 20.3 MBB p/d crude oil consumed in USA. A near record for early July.

    In order to convince financial programmers shorting oil was (another) major blunder we need to show Inventories are dropping. Never mind near record consumption. In order to counter-act this bullish (for markets, bearish for humanity) EIA needs to demonstrate three or four weeks running
    of diminished inventories.
    In point of fact, if we stop giving away our savings for a rainy day fund (SPR) crude would be selling $51. plus already. {instead of six bucks cheaper}

  2. Anonymouse on Tue, 11th Jul 2017 11:30 pm 

    I thought ‘consumers’ regulated the price of fossil fools, not algorithms. Narrativeman said it was consumers all the way down, so ya know, it has be true…..

  3. markisha on Wed, 12th Jul 2017 5:30 am 

    This make sense because almost nothing else does

  4. bobinget on Thu, 13th Jul 2017 9:01 am 

    Reuters News
    13-Jul-2017 13:10:14

    John Kemp is a Reuters market analyst. The views expressed are his own

    Chart 1:
    Chart 2:
    Chart 3:
    By John Kemp

    LONDON, July 13 (Reuters) – Saudi Arabia is trying to support oil prices by reducing its crude shipments to the United States in a bid to cut the amount of oil in commercial storage.

    U.S. crude imports from Saudi Arabia averaged less than 900,000 barrels per day (bpd) in the four weeks ending on July 7, according to the U.S. Energy Information Administration.

    U.S. imports from Saudi Arabia are running at the slowest rate since 2015, and the slowest for the time of year for over five years ( and

    Imports from Saudi Arabia will fall even further to less than 800,000 bpd in August, according to a Saudi industry source familiar with the kingdom’s oil policy.

    “Saudi Arabia is keen to see an improvement in the oil market and accelerate the balancing process,” the source told Reuters on Wednesday (“Saudis to cut August oil exports to lowest level this year”, Reuters, July 12).

    Saudi Arabia is cutting exports to all destinations but reducing shipments to the United States is especially important because U.S. stocks are the most visible and have the biggest impact on prices.

    The United States accounts for more than 40 percent of the commercial crude and product stocks held in the OECD and its stocks are reported weekly rather than monthly as in most other countries.

    U.S. crude and product stocks therefore receive disproportionate attention from oil traders and analysts, and can have a major impact on global oil prices.

    Changes in U.S. crude and products stocks are often (misleadingly) interpreted to reflect changes in the global supply-demand balance.

    Saudi Arabia is the largest supplier of crude oil to the United States after Canada, providing an average of 1.1 million bpd to U.S. refiners in 2016.

    By restricting shipments, Saudi Arabia hopes to reduce U.S. stocks and demonstrate to sceptical traders that the long-awaited rebalancing of the global market is finally underway.

    The strategy seems to have had some early success with U.S. crude stocks falling earlier and faster than normal so far in the second and third quarters of 2017.

    U.S. crude stocks have fallen by 40 million barrels since the end of March, compared with a drawdown of just 8 million barrels over the same period in 2016.

    U.S. crude stocks are now just 3 million barrels higher than at the same point in 2016, compared with 35 million barrels higher at the end of March.

    Most of the drawdown in crude stocks is attributable to record refinery runs but slower imports likely played an important supporting role.

    Senior officials from Saudi Arabia and the rest of OPEC are hoping U.S. stocks will continue to decline rapidly through the rest of the summer driving season.

    Saudi Arabia plans to use big stock draws to convince the oil market that rebalancing is happening and oil prices and calendar spreads need to rise.

    The strategy has a fair chance of success but it could be threatened by rising U.S. imports from other OPEC and non-OPEC members or a diversion of Saudi shipments from the United States to other markets.

    While Saudi Arabia’s crude shipments to the United States have fallen, Iraq’s shipments have risen to their highest seasonal level in almost five years (

    The International Energy Agency reports compliance with OPEC’s production agreement declined sharply in June to its lowest level in six months (“Oil Market Report”, IEA, July 2017).

    OPEC output rose from Nigeria and Libya, which are not capped by the agreement, and as a result of weakening compliance among other members.

    Some of this extra crude could end up refilling U.S. storage tanks, which would undercut Saudi efforts to drain them.

    Oil traders will also be alert for any signs crude shipments are being diverted causing stocks to grow in other less visible locations.

    Beyond August, there are questions about what happens to shipments and stocks when the U.S. driving season finishes and Saudi Arabia and Iraq start burning less crude as the summer air-conditioning season winds down.

    For now, though, OPEC hopes traders will interpret a sustained draw in U.S. crude stocks as a sign the market is rebalancing and that prices need to move higher.

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