Speculators keep the pressure on crude
TOKYO -- When West Texas Intermediate crude oil futures fell below $35 a barrel in New York trading earlier in January, it triggered a rush of sell orders.
Takashi Hayashida, chief executive of commodities trading house Elements Capital, pointed to speculators. Driving the plunge of the U.S. benchmark futures price were hedge funds known as commodity trading advisers, or CTAs. These funds, which play the financial and commodities markets with computerized systems 24 hours a day, mainly buy and sell short- and medium-term futures contracts on behalf of institutional and individual investors.
CTAs trade based on market trends rather than prices. They automatically place sell orders when selling outpaces buying. As a result, selling begets more selling.
Quality Capital Management, a leading CTA in London, is maintaining short positions because crude oil prices are likely to remain low in 2016, chief executive Aref Karim said. The company struggled to earn profits in the early 2010s due to limited fluctuations in futures prices. But it came back to life as crude plummeted in the second half of 2014 and raked in huge profits on short positions in 2015.
Efficient U.S. shale oil companies will maintain output even at a crude price of $30, Karim said. And with weaker demand in the wake of the Federal Reserve's interest rate increase, he said crude is destined to fall to the $20 level.
Expecting the oil glut to deepen, CTAs and other speculators have built up short positions to an all-time high.
Institutions in retreat
The market presence of investment banks, meanwhile, has weakened. This is due to a U.S. federal regulation known as the Volcker Rule -- named after former Fed Chairman Paul Volcker -- which restricts investments with banks' own accounts.
Pension funds and other long-term investors, which fueled price increases during the resource boom, have also retreated. The absence of investors that trade against the trend in a bear market has made the presence of CTAs more noticeable.
Oil producers rail against the market trajectory.
"In today's distorted oil markets, prices do not reflect reality," Igor Sechin, chief executive of Russia's state-owned Rosneft, wrote in a contribution to a British newspaper in February 2015. "They are driven instead by financial speculation, which outweighs the real-life factors of supply and demand."
The Russian government is preparing to create a new crude futures market it hopes will lead to prices based on supply and demand. This appears to be an attempt to check speculators.
In terms of scale, the market for crude oil futures is less than 1/2000th of the stock market. Yet when the oil market is shaken, other commodities markets and the stock market shiver. And it looks like speculators will continue to make their presence felt this year.