Energy Quantamentals: Myths and Realities about Algorithmic Oil Traders

The first article in the new series on Energy Quantamentals introduced the main participants in the market for oil derivatives. The article explained how the description of these participants is full of misnomers and that the behavior of many traders is often misinterpreted by the general public, and, unfortunately, is mislabeled by regulators. For example, according to regulatory definitions, the label of producers counterintuitively applies to large physical speculators, while the trading activity of genuine oil producers is conducted over-the-counter (OTC) via swap dealers. Furthermore, many analysts tend to mistakenly refer to all quantitative funds, financial speculators, and algorithmic traders as CTAs, which stand for commodity trading advisors. Such a generalization reflects a misunderstanding of who CTAs are and their role in the oil market. The objective of this article is to shed some light on their actual trading strategies even though the term CTA itself happens to be just another misnomer. The article also presents the main systematic signals which are commonly used by algorithmic traders in the oil market. While initially these signals were used primarily by CTAs, nowadays they are often utilized by fundamental traders as well. In contrast to similar technical signals in financial markets, these indicators are particularly powerful in the oil market where they have their roots in fundamentals, and, in particular, in the theory of storage.

By: Ilia Bouchouev

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