Like a Fresh Prince of Bel Air flashback from the early 1990s, middle east violence and geopolitical fears shot back into commodity traders’ lexicon recently – with Oil spiking nearly 20% on news there was a coordinated drone attack against Saudi Arabia’s oil infrastructure. The fantastical headlines by the likes of CNBC followed shortly after:
“Brent crude oil spikes the most in history after Saudi attacks”
Cooler heads sort of prevailed by mid-day, but energy futures markets were still much higher.
Here’s what managers and trader’s we’re speaking with are thinking of the move:
- One, the headline about oil spiking most in history is a little bit of a sleight of hand, as it was only on Brent and only on a percentage basis. A 20% move is nothing to shake your head at, to be sure – especially when it is on a Sunday with markets closed. But WTI has had $15 moves when jumping around above $100 back in 2007/2008, and this doesn’t feel like a Black Monday type of move. It was a surprise, it was big, but it wasn’t that big of a surprise.
- The spike was rather short-lived, with markets settling in at about half the initial spike levels ($66 in Brent Crude when spiked initially to nearly $72).
- Systematic models generally hate these type of binary moves, and much rather prefer elongated moves where new market prices are established over weeks, not minutes. The move reminded us of the Swiss depeg in some ways in relation to systematic managers and exposure. The Socgen trend indicator is showing that classic trend following models were short coming into the move, but we’re not seeing all that much exposure amongst managers we deal with (as it is a bit more complex on where and when such models get in), and haven’t heard any horror stories about hedge funds with massive short call positions or the like.
- This has been mostly a non-event for stock markets, with the US down slightly – but not really caring about the increase in geopolitical risk. The price moves thus far appear to be mainly about supply issues that will be caused by the Saudi’s production going offline. The geopolitical risk seems to have already been embedded, or is being ignored. It doesn’t seem all that long ago when coordinated attacks on Saudi oil supply would have sent the VIX soaring into the 30s and stocks down a few percent. Perhaps people are waiting to see if another shoe drops and things start to escalate… but either way, it all bears watching as the Middle East is back on the radar.
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