Trading data shows pessimism in oil market

As prices hover near a 15 month low, you can hear almost universal agreement: The stage is set for a rally, ask the world's biggest oil traders where the market is headed.

An examination of trading data tells a 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 put skew, a measure of bearishness, shows similar pessimism in the options market.

The tension that has been prevalent in the market for a long time is highlighted by the dissonance. 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. 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.

Rebecca Babin, a senior energy trader at CIBC Private Wealth, said traders can still have a bullish thesis but realize that surviving the next month is mission critical. Many investors are in survival mode. The mad rush for exits as investors dumped futures has reflected the 14% rout in prices since early this month. Wall Street banks and other financial firms had 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 rebound soon, many aren't actually taking on those positions. Bearish speculators appear to be in the driver 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 plunged 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 the coming weeks.

While cheap oil is painful for the traders who are sitting on bullish positions, consumers will benefit if prices stay muted. That could possibly reduce pressure on inflation and ease the Federal Reserve's job of getting broader price increases under control.

Markets are showing little conviction in a rally later this year. One indicator of oil market health - spread between US futures for immediate delivery and 6 months in the future - is narrowing as traders price in smaller increases ahead. 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, according to dealers.

Michael Tran, managing director at RBC Capital Markets, said that the fundamentals suggest higher prices and there are plenty of bulls in the market. The macro-induced fear factor has led to positioning. None of the ChatGPT Advances Are Moving So Fast Regulators Can't Keep Up With It.