Oil prices become more volatile as investors leave the market

Traders and fund managers have dumped crude oil markets in recent months, cutting activity to a seven-year low amid the worst global energy crisis in decades as investors unwilling to deal with persistent volatility. high.

The exodus of participants, especially hedge funds and speculators, has made daily price fluctuations much larger than in previous years, making it difficult for companies to hedge against physical purchases of oil. The volatility has hurt companies that need energy market stability for their operations, including oil and gas companies, but also manufacturing and food and beverage industries.

Brent Crude futures are swinging sharply on a daily basis. Between the Russian invasion of Ukraine on February 24 and August 15, Brent’s daily range between session highs and lows averaged $5.64. For the same period last year, the average was $1.99, a Reuters analysis of Refinitiv Eikon data showed.

High volatility is delaying increased capital spending that would help supply keep pace with energy demand, said Arjun Murti, a veteran energy analyst. When volatility is high, oil companies have less confidence in price forecasts, he said.

“There will be concern that prices could fall back to lower levels that don’t justify new capital spending,” Murti told Reuters.

Many different types of investors, including banks, funds and producers, have exited the market, participants said, as some days the market rises due to supply threats, while other days the cloudy economic outlook prompts equally wild sell-offs.

Overall open interest in the futures market has fallen nearly 20% since the start of the Russia-Ukraine conflict, according to data from JP Morgan. Open interest in Brent crude futures in early August stood at 1.802 million contracts, the lowest since July 2015, according to Refinitiv Eikon data.

The “story is mainly driven by speculators, trend followers and macro funds looking to hedge against an economic slowdown that the market is pricing in,” Ole Hansen, head of commodity strategy at Saxo Bank in Copenhagen, told Reuters. .

Volatility has had a severe impact on businesses in 2022, a July survey from Schneider Electric showed. Twenty-four of 100 companies in industries including energy, manufacturing and construction companies said it has severely affected their business, the survey showed.

Forty-three percent of companies said that energy budgets are the operational area most affected by supply chain disruptions, which have recently stemmed from the coronavirus pandemic and geopolitics.

“The huge increase in energy prices has created an imbalance in procurement, budgeting and production that is becoming increasingly difficult for us to maintain,” said one respondent in the industrial and manufacturing sector.

Seventeen percent of companies said they were not at all confident or only somewhat confident in their organization’s ability to hedge against future volatility.

PRICE SWINGS

Due to declining market share, oil prices move about $25 a barrel for every 1 million barrels a day change in supply or demand, JP Morgan said. That’s nearly double the $15 movement before the Russian invasion, he added. This creates a cycle where wild swings make investors less willing to trade the markets.

“The amount of open interest typically starts to drop when there is a lot of uncertainty and direction,” said Tony Scott, Vice President of Energy Analysis at FactSet. “You wait to pick your spots as the fundamentals become clearer about where things are going.”

The consolidation could also indicate that hedge funds that invested in the market a year ago are simply making a profit, he added.

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