In summary from a note via TD on the crude oil market.
TD argue that algorithmic trend-following strategies are unlikely to worsen the current downturn in crude markets, following a recent modest sell-off amounting to -6% of their maximum position size during the last session. TD says this marked the peak of selling activity for now.
- In fact, CTAs (Commodity Trading Advisors) are expected to start buying WTI and Brent crude under all scenarios in the coming week, even in the event of a significant decline.
There is a but, though, says the report:
- While this indicates a potential short-term rebound, analysis suggests that the issues go deeper than just market positioning.
- The risk premium on energy supply is falling sharply due to concerns over OPEC+ increasing production and optimism about a potential deal that could bring Libyan oil back into the market.
- Additionally, sentiment around commodity demand is weakening again, with traders particularly worried about reduced demand from China and possible refinery cutbacks.
- Pressure is mounting on OPEC+ to postpone their planned production increases to prevent further declines in supply risk premiums.
- For now, the risks are still trending downward, and traders cannot attribute further price drops to CTA flows alone if the weakness continues.
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As posted earlier, OPEC appear to be dithering:
