Underscoring lackluster price trends, oil derivatives are booming in a market that has largely avoided a turbulent start to the year fraught with geopolitical risks.
Open interest in major oil futures contracts – the total amount of futures and options held by oil traders – rose to its highest level since March 2022, according to data compiled by Bloomberg. Some 660 million barrels worth of oil derivatives have been added so far this year, even as oil prices remain firmly stuck in the $10/barrel trading band.
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Part of the answer lies in seasonal trends. Never in the past decade have traders taken their money out in the first few weeks of the year as investors rebalanced their portfolios for next year. However, the rate of increase in 2024 was also larger than average.
This is partly due to heightened political risks (the majority of the world's oil tankers sail through southern Africa as wars in the Middle East disrupt flows through the Red Sea) and traders' desire to reduce interest rates. This reflects the economic uncertainty surrounding the outlook and the pros and cons of lower oil prices in China. Growth will recover. Add in OPEC+ production cuts and there's a lot to keep traders busy, even if prices haven't shown it yet.
“Geopolitics remains supportive, but China is not,” said Tamas Varga, an analyst at brokerage PVM Oil Associates. “When the market goes up, you want to take profits on long positions. When the market plummets towards $75, you want to pick the bottom.”
Such moves partly reflect changes in the oil market, which is increasingly dominated by algorithmic traders who quickly switch from bearish bets to bullish bets. Net long positions in Brent and WTI derivatives by speculators have grown significantly in recent weeks, with Brent recording its biggest addition since 2018 last week.
There is also increased focus on the refined fuels market, which has felt the most disruption from the Red Sea attack. Traders are increasingly focusing on products such as gasoline and diesel rather than crude oil, as frigid temperatures caused widespread refinery shutdowns in the United States and scheduled maintenance in Europe.
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January was the busiest month for European diesel futures trading since 2021, surpassing any month since the region first imposed an embargo on Russian fuel. For similar contracts in the US, trading was the most active since February 2022.
But the relative enthusiasm for the fuel has done little to fuel expectations that oil prices will break out of that range anytime soon. Gambar Group warned that it will be more difficult to make significant profits this year as the market remains range bound and opportunities diminish.
“We're not going anywhere,” said Scott Shelton, an energy expert with TP ICAP Group. “I made the mistake of underestimating the upside, and I'm not going to do that again in the future, and I'm not going to underestimate the downside of a market that is still likely to go back up eventually.”
© 2024 Bloomberg
