Commenting on the sharp drop witnessed in crude oil prices, “oil markets were hit by waves of selling pressure this week as short-term systematic funds pivoted from liquidating “long” oil futures positions to building outright “short” positions,” noted Rabobank analysts.
“Medium-term momentum signals are also at risk of flipping from “long” to “short” over the coming days should prices continue to weaken, which could bring another wave of aggressive systematic selling to the oil market before the pressure subsides. As such, we are attributing a large portion of the recent fall in oil prices to the herd-like behavior of systematic funds rather than to any material shift in the fundamental outlook for oil markets.”
“Large speculators and particularly systematic funds have dramatically reduced their “long” oil futures exposure in recent weeks. In fact, the combined net managed money position for ICE Brent and Nymex WTI is now looking quite low by most metrics, and especially in light of the still strong positive roll-yield currently implied by the forward curves.”
“Looking forward, we see oil prices strengthening into year-end despite the recent washout of systematic traders. Further to that end, the reduction in oil exposure by large money managers is setting the stage for a potential “short” covering rally to ensue, especially given the news that Saudi Arabia could pause or slow the pace of the planned production increases into year-end.”