Can You Blame Algos For Oil's Recent Losses? Sure You Can!

Blame the Terminators. You can always blame the Terminators.
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On Tuesday, WTI managed to shake off confirmation of overt U.S. efforts to stem the rise in crude prices and there's a vociferous debate going on about whether and to what extent Saudi efforts to put the brakes on the rally in oil will be successful or otherwise warrant a bearish outlook.

For the time being, all anyone knows for sure is that calls for $100 crude aren't likely to be borne out any time soon. Coming into this week, WTI was nursing its second weekly decline and while some folks will invariably be predisposed to fading weakness for some of the reasons Goldman mentioned in the note highlighted in the third linked post above, trading against Al-Falih in the near-term is a damn suicide mission for obvious reasons.

WTI

Well with that as the backdrop, Nomura is out with a new piece that suggests recent price action may be in part attributable to CTAs paring longs.

"Nomura Tokyo’s realtime model suggests that systematic trend-followers like CTAs are reducing their net long positions on WTI, accelerating their unwinding as the WTI finally broke the technically important $67.3 – the average cost (breakeven) for CTA longs accumulated since February," the bank writes, in a note dated Tuesday.

CTAoil

As for the other "algos", Nomura says "risk parity investors are in a 'wait-and-see' mode on crude."

Will CTAs continue to sell, piling more pressure on prices? Well, maybe.

"Going forward, further risk reduction by CTAs is possible, in our view, given their systematic trading strategy if WTI cannot hold above $61.8, the average cost since September 2017," the bank continues, before concluding that they "would not be surprised to see CTAs reduce their long WTI position toward the historical average since 2009".

What would that entail for WTI? Simply put: $58.

So if you're looking to assign blame for your misplaced bets on triple-digit crude and you're inexplicably predisposed to looking somewhere besides Trump and Riyadh, there's a plausible argument to be made that the machines have accelerated the fundamentals-based decline.

As is always the case in modern markets, you can always blame this "guy" if you really want to:

yay

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