Ask the world’s biggest oil traders where the market is headed as prices hover near a 15-month low, and you’ll hear almost universal agreement: The stage is set for a rally.
But an examination of trading data tells a much different story. In the past two weeks, speculators have cut bullish positions in US crude to the lowest in more than a decade while bets on a downturn are at a four-year high. The options market shows similar pessimism in the so-called put skew, a measure of bearishness.
The dissonance underscores a tension that has been prevalent in the market for some time. The long-term outlook for prices is mostly bullish as US production stagnates while Chinese demand is expected to rebound and Russian output is projected to drop. But the near-term headwinds are significant, and prices have plunged this month as speculation mounts that weakness in the banking system could spark a full-blown recession.
Traders “can still have a bullish thesis but realize surviving the next month is mission critical,” said Rebecca Babin, a senior energy trader at CIBC Private Wealth. “Many investors are in survival mode here.”
The 14% rout in prices since early this month reflects the mad rush for the exits as investors dumped futures. That forced Wall Street banks and other financial firms to cover their positions in the options market, accelerating the selloff.
While top oil traders, from Trafigura Group to Pierre Andurand, continue to argue that prices will likely rebound soon, many aren’t actually taking on those positions. Instead, bearish speculators appear to be in the driver’s seat.
Andurand said in a March 23 tweet that holding oil was “the least fashionable thing on the planet at the moment.” His main Andurand Commodities Discretionary Enhanced Fund has tumbled about 40% this year, according to people with knowledge of the matter who asked not to be identified discussing private data.
Oil-price optimists point out that some of the current market weakness comes as Russian oil exports remain stubbornly high and French refinery strikes keep crude supplies ample, factors that could fade away in coming weeks.
And of course while cheap oil is painful for the traders sitting on bullish positions, consumers stand to benefit if prices stay muted. That could also potentially reduce pressure on inflation and ease the Federal Reserve’s job of getting broader price increases under control.
For now, markets are showing little conviction in a rally later this year. One gauge of oil market health — the spread between US futures for immediate delivery and 6 months in the future — is narrowing as traders price in smaller increases ahead. And the gap between December 2023 and December 2024 has slumped to near the tightest this year.
In the options market, one player spent $60 million on a single options trade betting that US crude would slump to $60 a barrel between July and October. The trade was one of the most expensive of the year, dealers said.
“Fundamentals suggest higher prices, and there remain plenty of bulls in the market,” said Michael Tran, managing director at RBC Capital Markets. “But the macro-induced elevated fear factor has led to positioning paralysis.”