(John Kemp is a Reuters market analyst. The views expressed are his own)
LONDON – Front-month Brent crude futures surged more than 10 percent higher yesterday, one of the largest daily percentage movements on record, as traders raced to cover short positions.
U.S. crude futures rose almost as much, with the October contract ending the day up by more than 9 percent.
Various fundamentals have been cited as the trigger for the rally, including the rebound in global stock markets and the declaration of force majeure on some Nigerian crude exports.
But whatever the initial cause, the main impetus driving the market higher was short-covering of futures and options.
A bout of short covering had been expected at some point given the concentration of bearish bets on oil prices over the last two months (“What might prompt a short-covering rally in U.S. oil price?” Aug 18).
Since mid-June, hedge funds have accumulated one of the biggest short positions in U.S. crude on record, equivalent to almost 160 million barrels of oil, up from less than 60 million, according to data from the U.S. Commodity Futures Trading Commission.
With so many speculators betting on a further decline in prices, the bearish trade had become crowded and vulnerable to any shift in sentiment that triggered a rush for the exit.
But the scale of the one-day move was still unusual. The one-day jump in Brent was more than four standard deviations away from the mean and has only been exceeded on seven days in the last quarter of a century.
The critical question now for traders worried about future volatility is how many of the short positions have been closed and how many still remain open and need to be covered at some point.
(Editing by William Hardy)
This article was from Reuters and was legally licensed through the NewsCred publisher network.