Oil went on an unprecedented roller coaster ride at the start of the week, with the price surging more than 30% to near $120 a barrel late Sunday – only to erase all of those gains just hours later.
Sure, a war is happening in the Middle East – but that wasn’t the only reason, On The Money has learned.
Despite all the yipping in the mainstream media about an allegedly intractable quagmire faced by President Trump, the oil-price shock was made demonstrably worse by a bunch of high-profile hedge funds including Israel Englander’s Millennium Management, Ken Griffin’s Citadel and Point72 Asset Management, run by Steve Cohen.
Trading sources tell On The Money each used market surveillance tools to copy each other’s trades in the oil futures markets. They also used similar AI-inspired algorithms to set risk parameters designed to prevent significant trading losses.
But when on Sunday, the initial headlines began to cross about a possible prolonged war, their algos kicked in all at once, sending oil prices through the roof as the funds attempted not to get stuck in a bad trade that resulted from the soaring price of crude. Each was said to have lost some big bucks.
Press reps for Millennium and Citadel declined to comment, though they wouldn’t deny the losses resulting from what one source called a “market whipsaw.” A spokesman for Point72 didn’t return email requests for comment. According to one Wall Street trader who was in the middle of the tumult: “This was pretty crazy and once the price of oil broke through their risk parameters, it was game on.”
Maybe the best indication that the steep rise in oil over the weekend was largely algo-driven was that the war isn’t going as bad as the price of oil those days would indicate. In fact, every Wall Street analyst I know briefed on the real situation on the ground is hearing that Iran’s military is on its last legs. It can still do damage, but less with each passing day.
That means tankers should soon be able to gain renewed access to the Strait of Hormuz. In the meantime, there’s lots of ways to make up for the decline in the Gulf supply: Oil from Venezuela, domestic production and releasing barrels from the strategic petroleum reserve, which is exactly what’s happening as I write this.
Also worth noting, particularly as we move forward with gauging crude as a proxy for the mission success, is how oil prices are set. Like all commodities, they aren’t set by some all-knowing sage declaring what a barrel goes for but on the open market controlled by commodity traders.
It’s been my experience that they are the shortest-term thinkers on Wall Street aside from proprietary stock traders. That means they trade off headlines, even if those headlines don’t provide context or are warped.
Meanwhile, so-called multi-strategy hedge funds — an investment pool that utilizes a multitude of trading tactics and styles run by Millennium, Citadel, Point72 and others — have rushed head-first into oil futures because of its volatility; a zigzagging security is a traders dream because you can jump in and out of your investment, pocketing your winnings from the price movement.
The multistrategies with mirrored bets on crude began buying futures en masse when the market opened 6 p.m. EDT and into Monday as their risk parameters controlled by algorithms began setting the price of oil well past $100 per barrel. They didn’t stop until oil hit a whopping $120 a barrel.
Prices fell when reality on the ground set in, underscored by President Trump’s comments the war won’t last forever. Oil is now hovering at around $87 a barrel, resulting in big losses at those hedge funds I just mentioned. Will the price continue to drop? A lot depends on how much more of Iran’s military and police state responds in the coming days, or is left to respond. Do they line the Strait of Hormuz with explosives, or can the US Navy provide cover for tankers to come and go through the region without getting hit by a drone?
Look for answers to these questions, and of course, the question of how much of the media’s fake-news narrative makes it into commodity traders’ investment calculus.
