Will Algos Push Oil Back To $60? Morgan Stanley Begs You To "Forgive The Macros, They Know Not What They Do"
By Tyler Durden
“Forgive the macros – they know not what they do.”
That is how Morgan Stanley’s Adam Longson begins his note explaining why while risks for oil continue to rise, the “macro rally can persist.” Specifically he says that while “oil continues to rise on the back of macro funds, CTAs, index/ETF flows and investors fearful of missing out” the fundamentals remain bearish and are set to deteriorate further, “esp if prices move higher. Non-fundamental rallies can last for several months and near-term catalysts may be lacking, but a macro unwind could cause severe selling given positioning and the nature of the players in this rally.”
In justifying the relentless “macro” driven buying, Longson writes that “close your eyes and buy seems to be the mantra for now.”
Here a curious question emerges: will the algo buying push oil back to the $60/bbl level we saw last summer. This is his answer.
While fundamentals don’t justify a cyclical recovery in oil yet, the market continues to move higher. The primary driving force has been macro funds, index money and CTAs. Technicals and momentum have only added to it, and there is a sense from some of investors that they need to buy for fear of missing out. Also similar to 2015, we see a confirmation bias where any bullish data point is embraced (e.g. supply outages, weekly US production, etc) and bearish data points are dismissed or spun as a buying opportunity (i.e. the worse is behind us).
Non-fundamental rallies can last for several months before the physical market pushes back. In 2015, the rally to $60 WTI lasted for over 2 months.
Yet, unlike other assets, there is a physical market behind commodities. If prices move too early, there are real world implications, even if those facts are slow to play out. It’s one reason why expectations investing is less effective in commodities. Nothing happens until it happens. Fundamentals are poor and set to deteriorate. The macro/CTA players are mostly generalists and quants expressing a macro view. Yet, the market impact underscores how macro and technical oil trading is at the moment. The problem is that prices are approaching important fundamental levels, and the fundamental trends look worse.
Meanwhile, the fundamentals are set to deteriorate:
Fundamentals are poor and set to deteriorate. The macro/CTA players are mostly generalists and quants expressing a macro view. Yet, the market impact underscores how macro and technical oil trading is at the moment. The problem is that prices are approaching important fundamental levels, and the fundamental trends look worse.
A significant number of supply outages are set to resolve in the coming weeks/months.
- OPEC production could rise nearly 1 mmb/d from Mar – June, and Doha’s failure could setup a market share war with many producers now calling for growth.
- Prices above $45 WTI will start to impact the rate of decline in US supply and should attract much more producer hedging. We are also already seeing increased appetite for energy lending after this move – a reversal from …read more
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