Every nuance and move by a central bank is bound to catch the attention of the market’s eye and this remains so with the decision by the Reserve Bank of Australia to hike its interest rate this morning by 25-basis points in the face of stubborn inflation. As the RBA is a member of the league of central bank gentlemen, the decision has somewhat scuppered the freely aired view that rate hikes are behind us. This then is reflected in a revival of the US Dollar’s fortunes that yesterday saw the Dollar Index (DXY), which only a week ago printed 107, rebound from 104.80 to 105.40 this morning after being somewhat put to the sword during recent looser US economic markers. In fact, the first nag at an easier interest rate environment was expressed yesterday in an interview with Reuters. ECB’s Robert Holzmann warned against ‘declaring victory too soon [...] and we should be ready to hike again if needed.’
 

Asian markets have since found an absence of buyers and have been also captured by the inconsistent trade data published by China. A recent Reuters poll predicted that imports would shrink in October by 4.8% year-on-year, but the recent nascent view of a China recovery was given a boost by the actual reading being an increase of 3%. Viewed in its own right, the figure looks impressive but it is paired with disappointing export data. Goods shifted away shrank 6.4% against a 3.3% forecast and yet again the market is left with an inconclusive Chinese economic picture. The import data from an oil perspective should also aid the idea of a possible increase of demand from the Asian powerhouse. October, year-on-year crude imports were up 13.5%, again impressive but counter arguments are readily at hand as much of the increase is due to Golden Week and of late China has begun to reduce refinery runs. 
 

It is not for nought that refinery utilisation is in the news bearing in mind how global margins are on the decline. In an extensive report yesterday Reuters touched on how US refiners are now aiming to continue in reducing runs with decisions based around the lack of demand for Gasoline. In a tight distillate environment, Gasoline is often collateral damage as refiners make up for its low value yield by higher prices for diesel, heating and their like. However, with a thus far benign winter north of the equator the oil complex is losing its distillate bid showcased in the recent reports of shrinking Diesel and Naphtha demand in Europe and ensuing lower prices. These pressures are now enough to have wiped all of the recent Middle East premium off of the Crude markets despite reports of some US SPR buying and the path forward will become even more hazardous as we enter a period where commodity futures markets will have to endure position adjustment by financial investors.
 

Funds set to confuse and depress progress
 

Yesterday, we touched on the unpredictable investment environment. Oil players are locked into a daily mental wrestle of finding a defining influence that will tip the state of balance in which the market has herded the news into. To an untrained eye the oil market would appear to be so efficient that it has assessed all that lies before it and achieved an equilibrium that in any other era might have prices screaming from the wrong side (or right, depending on your viewpoint) of triple digits. Sadly, the opposite is true and mostly our community enjoys a membership of frustration. Unfortunately, the forthcoming trading sessions are likely to experience more cerebral congestion as monthly investment technicalities unfold. 
 

Last week, the aggregate Open Interest in Brent futures fell to nearly 2 million contracts having reached nearly 2.4 million in September, this is the joint lowest it has been since March of this year. In accordance and showing agreement, WTI Open Interest fell to under 1.7 million lots, and both have seen reductions in volatility. Brent’s volatility towards the end of last week was ~41% falling to ~34% yesterday and WTI’s from 41.5% a week ago to 35%. This picture of declining exposure from investors is made complete by the state of managed money in both crude contracts and how they are so very much lower than they were in the aftermath of the murderous incursion into Israel.  
 

The state of positioning is brought into the spotlight this week as oil futures see the start of the fund ‘rolling’ period, where financial positioning is switched forward from spot and nearby months to further forward. Funds such as, but not exclusively, S&P Goldman Sachs Commodity Index (GSCI) and Bloomberg Commodity Index (BCOM) enter into these transfer windows and their influence on proceedings will be keenly watched. Notwithstanding how volumes and commitment to trade have diminished, the mere presence of approaching fund periods more often than not put a hiatus on markets’ progress particularly if it can be proven to be overly long. 

Therefore, in another instance of uncertainty and looking at the above as proof of exited positions, will the roll period have that much effect? Open Interest is as much an art as science these days and can be read depending on the mien of one’s opinion. One might argue that a shorter Open Interest will mean less lots in terms of possible selling from long fund rolls and their many look-a-likes, alternatively, with less Open Interest and recent volume reduction will whatever position switching that might take place have an outsize effect thereby creating a greater sell off?  
 

Unfortunately, there seem few signposts to paths of enlightenment, this observance of monthly futures technicalities serves little purpose other than to throw more mystery into oil’s ball of confusion. Flat price is admittedly adding a bearish tinge to structure in the Brent futures curve but take note that all spreads have converged through $0.40/barrel towards $0.35/barrel with spread to spread (butterflies) losing value creating a ‘flat’ board. These are all consistent with not only a market on the retreat after making a geopolitical move, but one that is defensive in the face of impending or at least suspected selling from index rolls.
 

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