CTAs likely to buy WTI and Brent crude – TDS

Signs of exhaustion have emerged in CTA sales in the markets of crude oiland CTAs are now likely to buy in all scenarios.

Downside risks continue to grow

“Algorithmic trend followers are unlikely to add to the pain in crude oil markets, following a modest selling program that totaled -6% of the algorithms’ maximum size in the last session, which marked the peak selling activity for the time being. In fact, CTAs are now likely to buy WTI and Brent crude in every scenario over the next week, even on a big dip.”

“While this portends a near-term bounce, our returns decomposition framework points to deeper issues than simple positioning dynamics. The energy supply risk premium is plummeting as concerns emerge over OPEC+ plans to increase output and optimism grows over a deal that could see Libyan output return to the market.”

“At the same time, commodity demand sentiment has also resumed its decline with concerns about Chinese demand and potential production cuts on traders’ minds. Pressure is mounting on OPEC+ to delay its plans to undo its cuts in an attempt to halt the decline in the supply risk premium. For the time being, downside risks continue to mount, and traders will not be able to blame CTA flows if prices continue to weaken.”