INTERVIEW: Short-term traders cause record short in oil futures market: Currie

Short-term players dominating the oil futures trade such as commodity trading advisors and algorithm-led strategies, have contributed to a record short in the market, the Carlyle Group's chief strategy officer of energy pathways Jeff Currie said.

"They're not responding to fundamental information in the way that discretionary traders previously did, but rather they trade on technical signals and momentum," Currie, a well-known economist specializing in energy and commodity markets, said in an interview with S&P Global Commodity Insights recently.

This comes as discretionary traders are sidelined amid healthy returns of about 5.3% in the money markets, making it difficult to pull that money out, he said.

"Given the volatility in oil, I estimate that return has to be in excess of 15% before you'd even begin to think about putting money to work in oil," Currie said, adding that "what's left over is primarily the systematic, short-term momentum players that have driven the oil market to a record short."

"When we look at the oil price today, it's less of a reflection of fundamentals and more of a reflection of positioning," he said.

Brent crude's speculative length had turned negative for the first time in history, after bearish bets on Brent by money managers exceeded Brent bullish bets following a rapid sell-off in crude futures markers since August.

Balanced portfolio

A balanced portfolio of both green and brown energy is needed to hedge against risks, amid volatilities that come from the energy transition, he said.

"The speed of the transition is uncertain. The technologies used in the transition are uncertain. The macro inflationary impacts are uncertain. And the policies are uncertain. And so, if you own both, you've hedged all those four risks," Currie said.

Although the energy transition should reduce fossil fuel demand, examples like China show that gasoline demand is still growing amid its move to electric vehicles, , he said, though growth has drastically slowed in recent years.

"When you put in all those costs of building the infrastructure [for electric vehicles and renewable electricity] that accompanies it, the energy sources become very expensive as the infrastructure has long lead times," Currie said. "Fossil fuels on an all-in cost are still cheaper."

In June, Carlyle said it would acquire a portfolio of gas-weighted assets from Energean with an expected production of 47,000 boe/d across Italy, Egypt, and Croatia – including interests in Italy's Cassiopea gas field and Egypt's Abu Qir gas production hub.

Talking about green energy investments, Currie highlighted that a promising growth area amongst the other renewable verticals is batteries.

"Batteries are the new barrels. Batteries make electricity portable and storable like a barrel of oil," he said. You want to make electricity and green energy be functional like oil, which means being portable and storable, and batteries can do that."

He also emphasized on the need for more electric grid investment, to complement and build up the renewable energy ecosystem.

"If you build renewables without a grid, it's a stranded asset. So, you need to coordinate the offtake transportation with the production investment," he added.

Uncertainties ahead

China remains a closely watched factor amid uncertainties in both conventional fossil fuels and the renewables market, he said.

"Markets really short all types of energy, green and brown. Why? I think a lot of it has to do with the level of market uncertainty around China, the total cost of investment and the level of uncertainty around the energy transition itself," Currie said.

"You've got three impediments -- a trade war, a weak property market, and demographics -- all acting as a drag on growth in China."

China's slowing oil demand was a key theme at the recent Asia Pacific Petroleum Conference or APPEC, where Currie took part in a panel discussion.

Although China's fast-expanding petrochemical capacity would likely boost liquid feedstock demand in the coming year, APPEC participants said it is unlikely to lead to higher global oil consumption because of the country's sluggish economic growth.

The upcoming US presidential election is expected to play a crucial role in dictating the relationship between the world's top two economies and impact China's growth. Regardless of its outcome, increased volatility in the market is expected due to uncertainty over trade policies.