Energy and Oil Quants – Who Are They?

You wouldn’t know it from the headlines, but quants aren’t new. And they aren’t just involved in stocks and bonds. The Wall Street Journal sort of picked up on the latter part recently, making the claim the energy markets are being driven by quant and systematic firms. What’s perplexing to us, though, is how easy it is for the article to confuse how these “quants” actually work.

Quants are a prime reason much of Wall Street got it all so wrong, Michael Tran, commodity strategist at RBC Capital Markets told the audience at the bank’s Global Energy and Power Executive Conference in New York this week. That’s because of the way they rely on and process publicly-available data.

Private data firms and analysts reported early this year that OPEC’s cuts were causing stockpiles to fall globally. But a lot of that data is relatively new and sparse; data about U.S. stockpiles, issued weekly by the U.S. government for years, has long swayed oil prices. Those reports shows U.S. stockpiles to be the last impacted by OPEC’s cuts, evening rising to new historic highs this year before recently starting a swift decline.

When the headline number – the total amount in U.S. storage – hit record highs, algorithmic traders focused on that and sold, Mr. Tran said. It mattered less how the actual amount of global supply was changing or about to change.

“There’s fewer fundamental traders counting the barrels and more [quants] reading the headlines,” he said.

Mr. Puko, the author, seems to be confusing ‘quant’ with ‘headline reading algorithm’.  A ‘quant’ creates an algorithm which can have inputs as simple as price and volume; and as complex as different countries price of production, the number of barrels in storage, recent headlines, interest rates, and more, and has outputs which are when to buy and sell and at what prices. A ‘quant’ creates a trading system which has a positive expected return. A headline reading algorithm will buy or sell based on certain trigger words. The former is sophisticated and akin to the architect. The latter is blunt and akin to the hammer. The architect uses the hammer to achieve his goal of seeing the plans come to fruition.  The quant similarly uses different systematic tools to see their plans come to life.

All of this is to say, blaming quants for markets moving ways fundamental traders aren’t expecting is a bit of a red herring, especially in energy markets – where big energy firms like Vitol and large commodity firms like Glencore still play their game day in and day out. Perhaps the blame should be on believing the old OPEC playbook in a world of new rules for Crude Oil.  After all, we know a few energy traders who’ve done just fine, thank you, during this period – quants and headline reading algos be damned.

How do these pros do it? What do they think of OPEC and quants and all the rest?  Register today for our June 22nd Webinar to hear about the energy market fundamentals from CME Senior Economist Erik Norland before a discussion amongst energy traders and how they’ve seen the market change.
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