It is hard to step into the controversial argument of the function of what used to be known as ‘black box’ trading. Sold to markets as bringers of liquidity, the role of algorithmic, high frequency trading (HFT) and the many other labels of machine-powered position-taking cannot be questioned in serving as sorts of market makers on exchanges since they left the open-outcry pits and migrated to the electronic state we see today. Their contribution is incontrovertible in the growth of energy exchanges such as ICE and CME/NYMEX for the very volume they create entices more correlative trading against the likes of equities and the wider investment suite through the efficiency of modern day programming or coding and the increasing function of AI. A good job, well done then? Well, it depends.

Oil markets at present are living with a real twitch factor, and so they should. With potentially explosive wars, a chequered macro background and a world in the throes of deglobalization, there are many and varied drivers to consider with each taking turns to come to the fore. Those within the oil-space understand all this, but what can be unfathomable are strange and frankly ridiculous moves that even with the benefit of hindsight defy logic. Taking yesterday for example and the move seen in M1/M2 WTI futures. Oil prices had been on the wane for much of the day, initially taken down by disappointing Chinese rhetoric from the National People’s Congress (NPC), but mainly in line with the equities that were in the process of a correction from the mega-caps in tech-stocks and a poor showing in the ISM Services PMI. Nasdaq had lost over 300 points, dragging the DOW and S&P with it and taking the assumption that correlation trading was being policed by electronic arbitrage then the move lower in oil prices can be explained away and so can some of the correction in time-spreads.

Without delving into Monday’s exaggerated move down on WTI spreads; at or around yesterday’s Platts window, a high trade was reported in March/April cash WTI and the ensuing buying in futures spreads is an obvious fallout. Yet, what should have been a sympathetic move turned into a clarion call of panic and not only did the front spread rally from 70c to 95c/barrel the M1 WTI flat price rallied nearly $2/barrel in 30 minutes because of the influence. This is not an isolated case, for most of the year cascades of buying and selling seem to have accelerative triggers and with the speed and volume in which they are traded means that they can only have an electronic origin. Pure oil trading/hedging/speculation is now vastly outnumbered and outgunned by black box flow and studied positioning from oil folk who plot shipping, refineries, pipelines and margin are left frustrated and indeed in some way sadly irrelevant.

Electronic flow is the King at present, to ignore it is to be run over. The amount of money in such trading must be commensurate to the ever-increasing fund values and its investment and potency within trading instruments. The narrow range that crude prices find themselves in at present, is a boon for electronic brains. Pivot points are the things to be plotted these days, not technical breakouts or where oil arbitrage works. The grip that such coding has on oil prices will only be broken once we have a dramatic world event that moves crude $5-$10/barrel and current programming is blown apart. Until then, we will have to see what Mr Black Box makes of the National People’s Conference, US Oil Inventory, Jerome Powell’s testimony and the UK budget today.

The National People’s Congress fails to impress

We must admit to having a certain amount of scepticism when mulling over what comes out of the mouths of the great and good of China. We shall not allow it to turn into cynicism, the laziest form of thinking, but it would make a change having to not greet grandiose announcements from grandiose get-togethers with a ‘whatever’. Our latest portion of disappointment is delivered via the National People’s Congress (NPC) which is the supposed highest authority in the land, laying claim to being able to change the constitution, however, it really has just become a rubber-stamping body to those decisions that are made in the real corridors of power at the Communist Party.

In an hour-long speech yesterday, Premier Li Qiang set an ambitious growth target of 5% for 2024, matching that of 2023 and at first look seems conservative against the actual 5.2% growth achieved in 2023. Yet, that 5.2% is rather flattering bearing mind the low base the economy had to climb from after the ravages of the pandemic and frankly disastrous zero-COVID policy. Five percent for 2024 is indeed ambitious when forecasting from the likes of Fitch, S&P, IMF and various economists gather their expectation around a 4.6% number and according to Capital Economics via the WSJ, for this year, achieving expansion of about 5% would require quarter-over-quarter annualized growth to average 5.3%.

China’s new home prices fell conservatively 0.7% year-on-year in January marking 7-straight monthly declines pushing many property developers to the brink of collapse making the task of policymakers all the more difficult with an ensuing fallout in confidence. Consumer Price Index (CPI) dropped by 0.8% in January from a year ago, according to the National Bureau of Statistics (NBS) while Producer Price Index (PPI), which measures costs of goods at the factory gate, fell 2.5 percent year-on-year giving China’s economy the ignominious tag of deflation. The Communist Party has in recent communiques been emphasising the importance of consumer spending growth that will lead to a driven economy. But with the data highlighted of an economy giving little hope, a consumer-led recovery so longed for after the relaxation of the grasping pandemic rules, is likely to stay hidden and match the bashfulness displayed by China’s citizens after confidence faltered midway through last year.

Such is the peculiar besottedness of China on manufacturing it looks as if it will insist on renewables, computer hardware and many other factory activities as the beneficiaries of any government largesse, which in this case comes in the form of an ultra-long-term central government bond equivalent of $138 billion in extra support for the economy. However, with its own domestic demand likely to continue to retreat and a global economy that is unable to absorb any further China exports, one wonders where the product of all this manufacturing can find markets. This is also notwithstanding the growing grievances from the likes of the EU and US on a flood of cheap China imports destroying domestic industry and adding to, in the case of some European quarters, threats of their own deflation and commentators smell the beginning of tariffs. As is the case with all geopolitical issues this year, the US election will have something to say about trade with China and a returning Donald Trump administration will not be reticent in wielding a tariff stick.

Musings aside, Premier Li said at the NPC, the government would continue with a "pro-active fiscal policy and prudent monetary policy", which all but puts paid to the idea of any sweeping stimulus package some economists believe are needed to revitalise flagging social confidence in the economy. It is all well and good reducing the Loan Prime Rate (LPR) but without a receptive borrowing appetite from the populace and local authorities hamstrung in debt and reluctant to add to it, this part of a staccato stimulus look-alike has failed to impress. If the NPC concludes with little reference to a full program of aid that directly relieves the pressures faced by ordinary folk, but continues to concentrate on security and manufacturing, the funk that the second largest global economy finds itself in will endure and so will the scepticism that follows status quo policies. Transferring this doubt into our field of bias, then it is at very least a worthy debate whether China’s oil demand growth forecasts may prove to be over-optimistic. 

Overnight Pricing

john.evans@pvm.co.uk

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