Oil trading in 2024 was marked by the near complete dominance of algorithmic trading. While not a new trend, algo trading arguably reached its peak last year, with technical analysis largely displacing any factual fundamentals considerations. Instead of making traders money, however, algo trading has lost them money.
Bloomberg reported earlier this month that 2024 was a loss-making year for algo traders—and it was the second loss-making year in a row for them. Throughout the year, driven by algorithms, oil traders bet on a demand slump in China and oversupply thanks to OPEC’s spare capacity and growth in production outside of OPEC, notably in the United States.
Throughout the year, the algorithms—or rather, their users—pointedly ignored facts such as OPEC’s unwillingness to use that spare capacity or the trend in OECD crude oil inventories, which declined considerably during the year. Throughout the year, algo traders had an outsized impact on oil prices. And they still lost money.
“Humans did have more success in 2024 than algos, which is different than the last couple of years,” CIBC Private Wealth Group senior energy trader Rebecca Babin told Bloomberg. It could probably be argued that 2024 saw the point of saturation with algo trading on the oil market, which sapped the very price volatility that algo traders thrived on in previous year. In 2024, oil prices traded in the narrowest range since 2019, per Bloomberg.
As a result of these developments, algorithmic traders have reduced the weight of oil in their portfolios by as much as half, from 4% in July last year to just 2% today, according to CIBC’s Babin. This means fundamentals are back—and it’s already showing. Oil prices have been trending higher since the start of the year as supply returns to the spotlight ahead of Donald Trump’s inauguration as U.S. president. Trump is expected to tighten sanctions against Iran, crimping Middle Eastern crude oil supply, and these expectations have now trumped the perception of weak Chinese oil demand that dominated oil bets in 2024.
Additional U.S. sanctions on Russian oil recently announced by the Biden administration also pushed oil higher earlier this month, again despite previous perceptions there was plenty of oil in the world that kept the benchmarks in a tight range.
“The new measures are likely to give the Trump administration additional leverage in future negotiations with Russia, as it decides whether, when, and under what terms to lift Biden-imposed sanctions,” JP Morgan analysts said in a recent note. Whenever these negotiations take place and whatever their outcome, in the meantime oil prices will be higher—with the Biden admin out of office, fuel availability at home is no longer its concern.
There is also the issue of energy transition and related oil demand predictions. Algo trading appears to have incorporated a lot of the assumptions made by organizations such as the International Energy Agency. The IEA has, in recent years, turned from an impartial energy provider into a staunch transition supporter, which has led some to question the reliability of its forecast data, for instance, on EV sales. This data has motivated oil trading decisions, and it has resulted in losses, inaccurately predicting oil demand destruction where in fact demand has continued to grow, including in China, the world’s biggest EV market. EV sales, meanwhile, have begun to decline in stark opposition to predictions they would keep surging.
Another reason for the losses experienced by algorithmic traders and their clients is the volume of algo trading, it seems. On several occasions last year, algo trading amplified oil price changes prompted by certain events, such as OPEC+ decisions to extend their voluntary production cuts. In June, an OPEC+ update to that effect caused a massive selloff in oil because it was perceived as a bearish signal for demand. Algo trading made the selloff even more massive.
“CTAs are just hammering away the market with massive selling,” one analyst from TP ICAP Group told Bloomberg at the time. Besides hammering away on the market, trend followers also overbet on a continued oil rout as well, eventually losing money as prices recovered—because fundamentals began getting some attention.
This year could deliver another lesson for oil traders who consider it more convenient and reliable to base their decisions on software. Forecasts about U.S. oil production growth are being revised in a hurry as reports about the maturation of the shale patch are multiplying. Forecasts about Chinese oil demand are changing, too, with the government in Beijing signaling it had more stimulus packages up its sleeve. Finally, no one seemed to expect the parting sanction slap on Russia by the outgoing U.S. administration.
After two years of over-reliance on software algorithms, 2025 could be the year fundamentals-based trading reestablishes itself. What impact this would have on prices remains to be seen.
By Irina Slav for Oilprice.com
