In ordinary circumstance there might have been a bit more chatter and hubbub from the bleachers of the oil market when the US Inventory Report showed a 6.368mb draw. At first glance, and when run alongside the increase by 0.4% of refinery runs, the data appears friendly. However, exports were 5.179mb, up 0.453mb or 7.5% and although increased production skews the 5-year average, they (exports) are nonetheless 1.348mb higher or 35.2%. With implied demand down in both Gasoline and Distillate, it does not exactly give a healthy state of domestic demand in the US which is signposted in the shrinking of PMIs posted earlier in the week. With little fresh news from the Middle East, frankly the inventory report is a garnish on the main dish of drivers being the plight of the wider suite and the Q1 reporting season and future forecast in the big names of equities.

Yesterday, markets were excited by Tesla’s promise on new affordable models and tech stocks duly rallied. This morning, Meta has reversed equity gains and sentiment as its stock price plunged 15% in US after-hours trading. First quarter revenue rose 27% beating expectation, but the company announced increased spending plans on AI features and it appears that shareholders have taken exception to the aggressive strategy. With other mega-caps reporting later, namely Alphabet, Microsoft and Intel, this period of equity uncertainty will continue to have far reaching effects on the wider suite. If that is not enough to stay the hand of investors the swathe of US economic indicators today surely will. Advanced Q1 GDP starts the proceedings and is expected to register 2.4%, along with Q1 advanced US Core PCE, the favoured measure of inflation of the FED, called at 3.4%. Anything unfavourable in the readings, and if Jobless Claims remain subdued the pricing of any US interest rate cut will see much movement and with it the US Dollar and so on and so forth. Oil prices today will not be in the hands of the oil market.
 

The rise of the machines

We have become slightly besotted by the price of copper and how its connection with energy markets is set to become even more aligned, maybe not always in price but at least in relationship. The growth of EVs, even though somewhat questionable at present, will always be a source of demand but nothing compared to power infrastructure and other modern technology, and because of it there have been various commentators warning on explosive price rises in copper. Is today’s report another stab at how copper is ultimately a harbinger of energy demand? No. Automation in modern society is only set to accelerate in growth and that automation will be very much made up of how artificial intelligence will be a demand driver for oil and copper in more than just burning and conductivity. Compared with the current activity, and here is the rub, artificial intelligence and how it is applied in commodity markets is about to go stratospheric in growth.

Decisions on when the machines give buy and sell signals are conducted by generative AI, which is a subset of artificial intelligence. The mathematical prowess of algorithms to access all forms of data corpus creates a live picture of so many and varied influences that would take an age if undertaken manually by a human. Garnering historical patterns, accessing large sources of data, spotting anomalies are just a few of the attributes of generative AI and why it is becoming more and more attractive for not only investment but in application. Risk managers within principal taking companies can now be offered hypothetical strategies from traders in simulation before a position is even taken. A proposed blueprint of a multi-faceted strategy can be theorised as AI has the ability to predict outcomes, hone the market approach all before any risk is deployed. In such circumstances, is it any wonder that the great and the good of the commodity world are now taking this form of electronic trading very seriously indeed?

Applying AI to vanilla physical trading will be a matter of study rather than game changing. If a refiner in ARA needs a certain grade of crude from the Mediterranean inside of a four-week window, it will not matter a jot that your personal Skynet informs on better times to ship, the oil needs to be moved. However, in electronic exchanges and derivative markets there remains rich soil for AI strategies to be planted. The prolific rise in all forms of electronic trading, made more obvious in recent times by over-egged moves, well at least from traditional trading eyes, has highlighted their growing influence. Influence is one thing, profitability another. In an extensive look at how banks, hedge funds and utilities are now investing in AI capabilities, and, according to McKinsey, in 2022, data-driven players captured almost a quarter of the power and gas value pool, jumping from less than 5 percent in the previous year.

Therefore, not only does generative AI offer incredible market intelligence, but it also appears to enhance the success of those that deploy it. The trading abilities of those in the employ of large commodity houses such as Vitol and Trafigura are about to be made keener as the companies invest in their own forms data-led AI. Even though there might be an element of catch-up in entering this space, such companies do not undertake commitments lightly and will have been watching how AI has fared for some time. The Financial Times was the first to report on how the largest of commodity trading companies are about to enter AI space race. Vitol’s CEO in an interview with the FT said, ‘trading houses were looking to AI to improve efficiency and develop a trading edge’. For those that thought AI-driven trading might be a flash in the pan have just been given a rude awakening. This form of electronic positioning has just been handed a massive boon and all in the oil fraternity will have to accept the exponential arrival to the inevitable. If one thinks that trading copper against oil is a bit exotic, wait until the machines are bidding crude against how you just switched the kettle on for a half-time football cup of tea.

Overnight Pricing

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