Don’t blame the algos for crude oil’s price swings, according to one economist.
“This is not algorithmic trading by speculators,'" Philip Verleger, president of energy consultancy PK Verleger LLC, said in a Bloomberg Television interview Thursday. “This is hedging of financial obligations to the people who are producing all this oil.”
Oil prices are on course for their worst fourth quarter since 2014. West Texas Intermediate crude traded above $76 a barrel in early October. Now, the benchmark is about 40 percent lower. In two trading days this week, oil fell more than 7 percent and climbed more than 10 percent.
“On Christmas Eve, the price started to fall and there were more puts sold by producers who were doing three-way calls and that just drove the market down sharply because there were no buyers,” Verleger said.
Currently, producers have hedged just 24 percent of their expected output for 2019, compared with 34 percent at the same time last year, because until October the price of oil had been rising, according to Bloomberg NEF.
“It’s essentially the hedging of put obligations,” Verleger said.
“The great story in the United States and the world is the emergence of the fracking business," he added. "The untold story is the fact that these people have to hedge.”
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