(Bloomberg) -- After a surprise OPEC+ cut prompted an 8% surge in crude prices, an unusual market signal is hinting the cartel may already be having some success in weeding out speculative short sellers.
Typically, Brent's leap on Monday — its biggest intraday gain in a tumultuous 12 months — would have coincided with a surge in volatility. Instead, implied volatility, a gauge of the pace of price swings in any direction, barely moved and even declined in parts of the curve.
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The slump offers early indications that OPEC+'s hit at speculators may be starting to work. The muted reaction is likely due to expectations that output curbs would keep prices in a narrow band in the short term, with a drawdown in inventories balancing out selling pressures from the wider market and recessionary fears, traders said.
Lower volatility could also be a sign that financial players such as hedge funds and algorithm-driven trading firms may have had to take up more measured trading decisions after a recent rout, they added.
“The oil market needs more players on the field,” RBC analysts including Mike Tran and Helima Croft wrote in a report. “Paper balances look meaningfully tighter than a week ago, but fresh length needs to be deployed in order for prices to move meaningfully higher.”
Momentum-based traders, including trend-following commodity trading advisors (CTA) who barely reference oil-market fundamentals, have largely remained on the sidelines, traders said. The group was a major driving force behind bearish bets in crude over the past months, leading prices to dip to a two-year low.
Brent may need to rise to $88 a barrel, and WTI to $85, before they resume significant purchases, TD Securities said in a note.
“Nonetheless, CTA positioning remains skewed short which suggests there is plenty of dry-powder for additional buying as physical markets are now likely to tighten quicker than previously anticipated,” TD analysts said.
Luckily for some speculators, the OPEC+ decision came as many had already unwound a majority of their short positions. As the worst of the global banking sector turmoil eases, speculators in US crude futures and options ditched their bearish bets by the most in seven years last week.
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