Traders are still investing in oil by-products despite the price cap in oil markets. Bloomberg data released on Tuesday 6th of February, showed that the open interest in primary oil futures contracts has peaked since March 2022. Oil derivatives of almost 660 million barrels have been added this year, yet crude oil prices are struggling to break out of the $10 range. The current trading price of WTI crude is $73.49 per barrel, which is less than its peak price of approximately $78 in the preceding two months. On the other hand, Brent crude is trading at $78.85 per barrel after reaching a peak of $83 at the same time.
The increase in oil in traders’ portfolios could be the reason why traders return to the market when prices drop. According to PVM Oil Associates, it is “tempting to pick up the bottom,” Bloomberg reported. Despite the difficult situation in the Red Sea, which threatens to disrupt global energy flows, oil prices have only fallen lower than their 2023 peak in September. Several factors have contributed to this, including pockets of weakness in the market, such as China’s struggling economy and questions about OPEC’s output. Some analysts believe that the turmoil in the Red Sea acts as a baseline floor for prices, preventing them from dropping further. Another factor is the US oil boom that had a significant impact on prices last year.
It’s possible that the increase in derivative trades indicates the growing influence of algorithmic traders, who now dominate the market. These traders use programmed code to make quick trades and can easily shift from bearish to bullish positions. Bloomberg’s recent data shows a reversal of net-long positions in Brent crude and WTI derivatives, with Brent experiencing its largest addition since 2018 last week. Vicki Hollub, CEO of Occidental, stated that the markets could soon experience a 180-degree turn. Despite the current oversupply of oil, which has kept prices down, there is a possibility of an undersupply of crude becoming the dominant market trend in the years to come.
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