Momentum Begets Momentum, Speculators Are Screwing The Pooch On This One For The Oil Market
For long-time readers, many of you may remember the debacle of Nov 2018 when WTI went down for 12 days straight. Due to shale producer hedging, there was a lot of negative delta gamma hedging, which created a death spiraling effect pushing WTI from $70 all the way down to $46 by the end of the sell-off.
What we are currently seeing in the oil market is no different. Like all things markets, there's always some slither of truth in what the opposing view is saying, but at the end of the day, everything is driven by liquidity.
From a fundamental perspective, when Brent timespreads went from backwardation to contango (due to worries about possible oversupply in Q1), this started an armada of selling from the quant funds (i.e. CTAs). Couple the negative selling pressure with the fact that we are approaching year-end and traders do not want to risk losing out on their bonus for the year and the market has created a very illiquid environment.
Here is a chart published by John Kemp today illustrating the ratio of money manager long to short positions in Brent. Notice that we are below where we ended the oil sell-off back in 2018 around 2.15. And as you may have already noticed, levels approaching this area have always produced a rebound of some sort in the following weeks/months. We think this time is no different.