Signs of CTA selling exhaustion in crude oil markets have emerged, and CTAs are now likely to buy in every scenario. 

Downside risks are still growing

“Algorithmic trend followers are now unlikely to add to the pain in crude markets, following a modest selling program that totaled -6% of the algos' max size over the last session which marked peak selling activity for the time being. In fact, CTAs are now likely to buy WTI and Brent crude in every single scenario over the next week, even in a big downtape.”

“While this bodes well for an imminent-term bounce, our return decomposition framework points to deeper troubles than simple positioning dynamics alone. Energy supply risk premia is plummeting as concerns emerge over OPEC plans to increase production and optimism rises over a deal that could see Libyan production return to market.”

“At the same time, commodity demand sentiment has also resumed its slump with concerns around Chinese demand and potential run cuts on top of traders' minds. Pressure is growing on OPEC to delay their plans to unwind their curtailments in an attempt to halt the slump in supply risk premia. For the time being, downside risks are still growing, and traders won't be able to blame CTA flows if prices continue to weaken.”