CTA’s oil deleveraging is over

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The Weekly Brief

Doubts about global growth eventually caught up with oil prices when supply risk unexpectedly eased. Over the summer, spiking oil prices and assurance from the U.S. that no sanction waiver on Iran crude imports would be granted, led Saudi Arabia to turn its tap on prematurely. At a time when several OPEC members also eased their compliance with quotas, the U.S. administration unexpectedly granted 6-month sanction waivers to eight countries. Both softer demand expectations and easing supply risks spurred a sharp reversal in oil prices. However, we believe systematic and hedging de-risking largely magnified the plunge. CTAs deleveraging dominated throughout October. In aggregate, their long held WTI and Brent positions were nearly fully cut by the end of October, along with about two-thirds 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 during 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 hedgedproduction price stood around $61.5/b for WTI. It forced financial institutions, which had sold these hedging strategies, to adjust their own exposures accordingly