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Analysis: Oil prices become more volatile as investors exit the market

An oil pump jack pumps oil in a field near Calgary, Alberta, Canada on July 21, 2014. REUTERS/Todd Corroll

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NEW YORK/LONDON, Aug 17 (Reuters) – Traders and fund managers have fled crude oil markets in recent months, reducing activity to a seven-year low amid the worst global energy crisis in decades as investors reluctance to deal with persistently high volatility. .

The exodus of participants, particularly hedge funds and speculators, has increased daily price volatility from previous years, making it difficult for companies to hedge against physical purchases of oil. Volatility has hurt companies that need energy market stability for their operations, including oil and gas companies, but also the manufacturing and food and beverage industries.

Brent crude futures are swinging wildly on a daily basis. Between February 24 and August 15, between Russia’s invasion of Ukraine, Brent’s daily range between the session high and low averaged $5.64. During the same period last year, the average was $1.99, a Reuters analysis of Refinitiv Eikon data showed.

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The high volatility is delaying increased capital expenditures, which would help supply keep pace with energy demand, said veteran energy analyst Arjun Murthy. When volatility increases, oil companies have less confidence in price forecasts, he said.

“There is concern that prices may return to low levels that do not justify new capex,” Murthy told Reuters.

A wide variety of investors, including banks, funds and producers, have exited the market, participants said, adding that on some days the market rises on threats to supply, while on other days a cloudy economic outlook leads to an even sell-off.

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 stood at 1.802 million contracts at the start of August, the lowest since July 2015, according to Refinitiv Eikon data.

“The story is driven primarily by speculators, trend-followers and macro-focused funds looking for a hedge against an economic downturn priced out of the market,” Ole Hansen, head of commodity strategy at Saxo Bank in Copenhagen, told Reuters. .

A July survey from Schneider Electric showed that volatility will have a severe impact on businesses in 2022. The survey showed that 24 out of 100 companies across industries, including energy, manufacturing and construction firms, had a severe impact on their business.

Forty-three percent of companies said energy budgets were the biggest operating area affected by supply-chain disruptions recently arising from the coronavirus pandemic and geopolitics.

“The massive increase in energy prices has created imbalances in procurement, budgeting and production that we are finding increasingly difficult to manage,” said respondents to the manufacturing and industry sector survey.

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

Price swings

As market participation declines, oil prices move by $25 per barrel for every 1 million barrel-per-day difference in supply or demand, JPMorgan said. That’s nearly double the $15 move before the Russian invasion, it added. This creates a cycle in which wild swings make investors less inclined to trade the markets.

“When there’s a lot of uncertainty and direction the open interest rate usually starts to fall,” said Tony Scott, vice president of energy analysis at FactSet. “You wait to pick your spots as the fundamentals become clear about where things are going.”

He said the consolidation signals that hedge funds that invested in the market a year ago are simply profiting.

Oil futures in 2022 have seen huge swings between session highs and session lows throughout the day.
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Reporting by Stephanie Kelly in New York and Noah Browning in London; Additional reporting by Aarti Somasekhar in Houston and Julia Payne in London Editing by Matthew Lewis

Our criteria: Thomson Reuters Trust Principles.

Stephanie Kelly

Thomson Reuters

A New York-based reporter covering the US crude market and a member of the energy team since 2018, covering oil and energy markets and federal policy around renewable fuels.

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