Oil traders are piling into a market that’s not going anywhere

Oil derivatives are booming, belying the lackluster price moves in a market that’s largely shrugged off a tumultuous start to a year fraught with geopolitical risks.

Open interest across the main oil futures contracts — the total volume of futures and options held by oil traders — climbed to the highest since March 2022, according to data compiled by Bloomberg. So far this year, the equivalent of about 660 million barrels of oil derivatives have been added, despite crude prices being firmly stuck in a $10-a-barrel trading band.

Part of the answer lies in seasonal trends. Over the past decade, there hasn’t been a single occasion that traders have taken money off the table in the opening weeks of the year as investors rebalance their portfolios for the year ahead. But the upturn in 2024 has also been bigger than average.

That in part reflects heightened political risks — a chunk of the world’s oil tankers are sailing around the south of Africa as war in the Middle East disrupts flows through the Red Sea — and economic uncertainties as traders wrestle with the outlook for interest rates and whether Chinese growth will recover. Add in OPEC+ output cuts, and there’s plenty keeping traders busy even if prices aren’t yet showing it.

“Geopolitics is still supportive, China is not,” said Tamas Varga, an analyst at brokerage PVM Oil Associates. “When the market rallies, it’s tempting to take profit on long positions. When the market dumps towards $75, it’s tempting to pick the bottom.”

Such moves also partly reflect a changing oil market increasingly dominated by algorithmic traders, who quickly flip from bearish bets to bullish ones. Net-long positions held by speculators in Brent and WTI derivatives have whipsawed in recent weeks, with Brent last week posting the biggest addition since 2018.

There’s also heightened attention on refined fuel markets, as those have felt the biggest disruption from the Red Sea attacks. Coupled with significant refinery disruptions in the US following freezing weather and scheduled maintenance in Europe, traders are increasingly focused on products like gasoline and diesel rather than crude.

January saw the busiest month for trading on Europe’s diesel futures contract since 2021, eclipsing any month since the region first embargoed Russian fuel. For similar contracts in the US, trading was the most active since February 2022.

But the relative enthusiasm for fuels is doing little to spur expectations that crude will break its range any time soon. Gunvor Group warned that it will be more difficult to generate bumper profits this year as markets remain range-bound and opportunities dwindle.

“We are going nowhere,” said Scott Shelton, an energy specialist at TP ICAP Group. “I made a mistake of underestimating the upside, I am not going to do it again and underestimate the downside in a market that is still likely to revert higher eventually.”