Lyxor Weekly Brief: CTAs’ Oil Deleveraging is Over!
Lyxor Weekly Brief: CTAs’ Oil Deleveraging is Over!
Doubts about global growth eventually caught up with oil prices when supply risk unexpectedly eased. Over the summer, spiking oil prices and U.S. assurances that no sanction waiver on Iran crude imports would be granted led Saudi Arabia to turn its tap on. At a time when Saudi Arabia and several OPEC members relaxed their compliance with production quotas, the U.S. administration unexpectedly granted 6-month sanction waivers to eight countries. Both softer demand expectation and easing supply risks spurred a sharp reversal in oil prices.
Doubts about global growth eventually caught up with oil prices when supply risk unexpectedly eased. Over the summer, spiking oil prices and U.S. assurances that no sanction waiver on Iran crude imports would be granted led Saudi Arabia to turn its tap on. At a time when Saudi Arabia and several OPEC members relaxed their compliance with production quotas, the U.S. administration unexpectedly granted 6-month sanction waivers to eight countries. Both softer demand expectation and easing supply risks spurred a sharp reversal in oil prices.
However, we believe systematic and hedging derisking largely magnified the plunge.
CTAs deleveraging dominated over October. In aggregate, we observe that their long held WTI and Brent positions were nearly fully cut by the end of October, along with about two-third of their long exposures to heating and gasoline oil. In early November, CTAs involvement in the oil prices demise was milder: they unloaded what they had left in crude futures, and kept only marginally long positions in heating and gasoline oil futures.
Financial de-hedging likely dominated in November, as oil prices breached levels at which producers had hedged their output. Based on a large sample of U.S. producers’ reports, we estimate that their median hedged-production price stood around $61.5/b for WTI. It forced financial institutions, which had sold these hedging strategies, to adjust their own exposures accordingly.
Selling pressure was all the more impactful as oil futures trading volumes plunged in November. Apart from CTAs, most multi-asset managers (including global-macro and risk-parity funds), had limited exposures to oil assets. The lack of market breadth magnified the impact from CTAs and then financial institutions in our view.
Save another round of economic disappointment, CTAs’ deleveraging is mostly over. Along with normalized investors positioning, selling pressure could fade. Some catalysts could also help prices stage a partial mean reversion. The U.S. reversal in regarding Iran sanctions will probably lift OPEC’s scruples to adjust its output accordingly at its December 6 meeting in Vienna. Moreover, persisting risk regarding Venezuelan and Libyan oil output would remain supportive. Finally, saturation in U.S. oil pipelines, refineries and oil service will only gradually improve next year: most of the new pipelines are expected to be operational in H2, not H1.