Oil Market Struggles to Shake the Ghost of Crashes From the Past

(Bloomberg) -- Investors just don’t love oil like they used to.

West Texas Intermediate crude fell the most in 4 1/2 years on Thursday as President Donald Trump reignited demand worries with a threat of new tariffs on imports from China. The slump was a reminder that crude markets have struggled to regain investor confidence after the U.S. benchmark wiped out more than 40% of its value during the final quarter of 2018.

Holdings of WTI on the New York Mercantile Exchange -- or aggregate open interest -- are down about 12% since the same time last year. By contrast, they almost doubled from the end of 2014 to May 2018. The same measure for global benchmark Brent on the ICE Futures Europe exchange is still lower than its peak in May of last year.

In another sign of investor apathy, speculative positioning in the U.S. benchmark fell to its lowest level since March 2013 last month, while the number of entities with positions in WTI matched a five-year low.

“This weakness reflects macro concerns and the limited appetite for macro money to enter the market,” says Warren Patterson, head of commodities strategy at ING Bank NV. “It does seem you need a lot to get the market up a bit, and not much for a big selloff.”

The wariness also shows up in trading volumes. For Brent, an average of 831,000 contracts have traded every day so far this year. That’s down from 908,000 during the same period last year. WTI aggregate volume has slipped to an average of 1.2 million contracts this year from 1.3 million through the first seven months of last year.

Investor indifference isn’t limited to crude. Overall flows into commodities are down 1.9% so far this year, Bank of America Merrill Lynch analysts including Michael Hartnett said in a report dated Aug. 1. That compares with a 1.2% drop in equity holdings, along with increases for bonds and money markets, they said.

Still, trade tensions and concerns about global growth are weighing on oil.

“Under these circumstances there is a natural hesitancy for money in initiating long exposure in oil futures,” said Harry Tchilinguirian, head of commodities strategy at BNP Paribas SA. “Between an underwhelming Fed decision on Wednesday lending a hand to strengthen the dollar and a further escalation in the U.S.-China trade confrontation, the economic outlook becomes even more uncertain.”

To contact the reporter on this story: Alex Longley in London at alongley@bloomberg.net

To contact the editors responsible for this story: Alaric Nightingale at anightingal1@bloomberg.net, Brian Wingfield, Fred Pals

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