Why Oil Traders Are Facing Fading Volatility Thanks to Trump Tariffs

Yahoo

01-08-2025

(Bloomberg) -- The oil market is flatlining.
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After months of uncertainty sparked by global geopolitical tensions and US President Donald Trump's tariff proposals, crude traders have increasingly retreated to the sidelines. That has reduced liquidity and volatility in the crude market, two things often required to generate profits.
To see how this is playing out, consider the recent action in West Texas Intermediate futures. Prices lurched up or down by roughly $3 a barrel per day on average in April, following Trump's initial unveiling of trade levies. This month, in contrast, prices have only broken out of the $3 range in a single session. As a result, implied volatility — a key gauge watched by the market — is currently hovering near three-month lows.
With a constant stream of tariff-related headlines and pronouncements by Trump, commodities traders are hardly starved of new information. Yet the sheer unpredictability of US policy and the lack of clarity around its economic impact has given a lot market players reason to hit pause.
On Thursday, Shell Plc Chief Executive Officer Wael Sawan joined a list of industry executives who pointed out that such market turbulence, which has little to do with the realities of day-to-day supply and demand, isn't easy to deal with.
'We are much more of a fundamentals-based trader, so we chose to be a bit more risk-off, more of a prudent risk-management approach,' Sawan said during a Bloomberg Television interview.
To be sure, a lull in market activity isn't an unknown phenomenon during summer months.
And some news can still break through and get prices swinging again: On Tuesday, after Trump ramped up pressure on Russia to reach a truce with Ukraine, WTI jumped as much as 4.6%, the first time in July that prices have moved more than $3. On Wednesday, the market settled at a six-week high as Trump said he would impose a tariff on India's exports and a penalty for its energy purchases from Russia. But by Thursday, prices were back to a holding pattern as traders took a breather waiting to assess the likelihood of a meaningful disruption to supply.
'There's been a ton of anxiety' surrounding tariffs and related US policy, said Sean Lambert, partner at DV Trading and global head of DV Commodities, a proprietary trading firm.
Some algorithmic traders managed by Lambert's team, which had already been steadily reducing their position size since later December, began withdrawing from the market at a notably faster rate around the time of Trump's initial tariff roll out, he said. The shift was partly due to poor performance for that part of the firm, he added.
Part of what's happening is the oil market's interpretation of the TACO trade, based on the notion that 'Trump Always Chickens Out' from extreme tariff threats. For oil, that's meant traders aren't eager to react to hypothetical supply and economic risks, instead they're waiting to see if the disruptions end up hitting.
Patrick Pouyanne, chairman and chief executive officer of TotalEnergies SE, has characterized the market conditions with this: 'Volatility around Tweets is not tradeable.'
Speculators aren't taking as many positions further along oil's so-called price curve, which reflects the market's outlook over time. As short-term contracts gain traction at the expense of longer-dated ones, it becomes harder for producers to lock in prices for future revenue. 'We are obliged to be more short term,' Pouyanne said on an earnings call this month.
Open interest, a proxy for money in the market, has climbed to the highest in almost a year for WTI's front month, while the measure is languishing for contracts dated March 2026 and beyond.
'There is less risk taking in the trading environment currently,' Equinor's Chief Financial Officer Torgrim Reitan said on an earnings call in July. 'The volatility is driven by political decisions, which makes it harder for traders to trade around.'
Meanwhile, commodity trading advisors, the group known as CTAs that tend to rely on trend-following algorithms, have chopped the weight of crude in their portfolios by roughly half since October 2024, according to data from CIBC Private Wealth Group. That's softening the cohort's impact on market movements, said Rebecca Babin, a senior energy trader at the firm.
Data from Bridgeton Research Group show that CTAs are on track for a third straight annual loss, the longest streak in more than 15 years.
And while oil continues to trade in a narrow range day-to-day, the long-term trajectory remains lower. Investors are bracing for a deluge of crude supply from OPEC+ as the group raises production quotas along with the fallout from Trump's trade war on energy demand.
'Once things get more predictable, there's going to be a lot more people willing dive back in — and that's us included,' DV's Lambert said. 'But I don't know if we'll get to that point in the next three and a half years.'
--With assistance from Lucia Kassai and Yongchang Chin.
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