Oil Market Swings Wear Down Traders as Iran War Drags On

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(Bloomberg) — Almost a month into a deepening conflict in the Middle East, oil traders reeling from weeks of massive market swings are beginning to pull back, creating a drain on liquidity that threatens to exacerbate future moves.

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Four of the six largest swings ever seen in international oil benchmark Brent futures have come since the war started at the end of February. Now, as traders struggle to adjust their exposure and protect their positions after weeks of extreme moves, more appear to be sitting on the sidelines.

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Total Brent futures open interest plunged to the lowest in four months earlier this month. Consultant Energy Aspects said its measure of liquidity in Brent has fallen to the lowest level since at least April 2024.

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“I sense fatigue out here and less liquidity,” said Scott Shelton, an energy specialist at TP ICAP Group Plc. “Most humans have either pared back risk to adjust for VAR (value at risk) exploding or got out completely, which leaves the oil market to the algos competing on trading headlines and generating pain.” 

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“I am exhausted and my clients are there too as well,” he added. 

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The White House’s constant shifts — veering from threats of massive attacks to optimism about negotiations — have kept traders on edge.  Most are constantly monitoring US President Donald Trump’s latest pronouncements, which can come at any time, day or night, weekday or weekend.

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After weeks, they remain alert, but some say actual trading has begun to cool. 

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When market volatility spikes, traders’ value at risk — the maximum loss that the position may see during a given period of time — can balloon. Many traders have also hit stop-loss triggers, forced to close out bets after the market reached a pre-determined level. Most of the pullback has been in the futures market and inter-month spreads, traders and brokers said. 

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The lack of liquidity has arisen partly because many speculative players are long, leaving few traders to buy dips in prices, according to Tim Skirrow, head of derivatives at Energy Aspects. High levels of realized volatility are also contributing to the lower liquidity, he added.

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Brent’s 20-day average realized volatility has reached the highest since Russia’s invasion of Ukraine in 2022. That’s even dampened participation among some algorithmic traders notorious for amplifying price swings in regular market conditions.

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“The increase in volatility is such that many traders will likely find their available risk capital or VAR is used up very quickly,” Oxford Institute for Energy Studies analysts Bassam Fattouh and Ahmed Mehdi wrote in a note. “The potential for large margin calls means that stops are unlikely to be placed too far from current values.”

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While many smaller traders have been stopped out of positions or curbed activity, some larger institutional players appear to be holding on.

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Traditional commodity trading advisors, also known as trend-following strategies, have sustained maximum long positions in both oil benchmarks since early March and have widened their stop-out levels to points well beyond current price ranges, according to Kpler. This allows them to hold steady and capture profits while sitting out the breakneck pace of today’s trading environment, the firm added.