Algo Oil Traders’ Selling Seen Mostly Done After Furious Rout

(Bloomberg) -- Oil traders that rely on trend-following algorithms have rapidly turned bearish over the past week as a plunge in equities reverberated across markets, and the bulk of their selling may already be completed, according to firms that track those investors.

As gloomy data on the US and Chinese economies caused a global market rout and raised concerns about oil demand, commodity-trading advisers turned more bearish on US crude and flipped to a net bearish stance on Brent this week, according to data from Bridgeton Research Group. The CTAs are close to the peak of their short positioning, says EA Quant Analytics, which tracks similar data.

Commodity-trading advisers have grown into a formidable presence in oil markets in recent years, and their trend-following trading style often amplifies price moves in both directions, making it harder for physical traders to navigate the market. Even in the weeks before the recent tumble, CTAs had been selling off oil futures, helping push prices to multi-month lows.

“There’s not too much CTA selling to go from here,” said Nicky Ferguson head of quantitative research at EA. “For commodities as a whole, we’ve seen significant selling over the past few weeks leading up to this position unwind.”

The most recent positioning data from the US Commodity Futures Trading Commission show that hedge funds had net bearish wagers in commodities markets as a whole for the first time since 2016 last week.

For commodity trading advisers to become fully short on oil, US futures would need to fall below $70 a barrel and Brent would need to drop below $65, Bridgeton estimates. CTAs are currently net short in US crude by about 73%, compared with about 27% net short at close last Monday, the firm says.

CTA’s current short positioning is near the 85th percentile versus history, meaning it’s higher than it has been 85% of times in the past, EA says.