At the beginning of the week, oil prices experienced an extraordinary fluctuation. They jumped by over 30% to nearly $120 per barrel on Sunday evening, only to retract those gains within hours.
While the conflict in the Middle East is certainly a factor, it’s not the sole reason, according to On the Money.
Contrary to various reports about the challenges President Trump might be facing, the oil price surge has evidently been amplified by several high-profile hedge funds, including Millennium Management led by Israel Englander, Ken Griffin’s Citadel, and Steve Cohen’s Point72 Asset Management.
Traders explained that these firms utilized market surveillance tools to mimic each other’s strategies within the oil futures market. They also employed similar algorithms driven by AI to manage risks, aiming to mitigate any potential trading losses.
However, as news emerged on Sunday about the potential for a prolonged conflict, the algorithms responded simultaneously, triggering an abrupt spike in oil prices as funds rushed to safeguard themselves against escalating costs. Reportedly, substantial losses were incurred.
Representatives from Millennium and Citadel chose not to comment, though one source indicated that the losses stemmed from what they termed “market turmoil.” Attempts to reach Point72 for a comment went unanswered. “It was pretty wild. Once the oil price hit those risk thresholds, it was chaos,” a trader on Wall Street commented amidst the situation.
A sign that the spike may have been largely algorithm-driven lies in the fact that the actual conflict was not as severe as hinted by the oil prices at that time. In fact, several analysts familiar with the on-ground developments have suggested that the Iranian military is nearing the end of its operations. While damage can still occur, it’s likely to lessen each day.
This could mean that tankers may soon regain access to the Strait of Hormuz. In the meantime, there are various ways to compensate for supply decreases in the Gulf, such as sourcing oil from Venezuela, increasing domestic production, and releasing barrels from the Strategic Oil Reserve—steps that are reportedly already in progress.
It’s also worth pondering how future oil prices will be determined. Like other commodities, prices aren’t dictated by some all-knowing authority but are instead established in open markets governed by traders.
From my perspective, the traders in this sphere tend to be quite short-sighted, perhaps more so than stock traders. They react swiftly to headlines, even when these don’t always reflect the full picture.
Currently, oil prices are around $90 a barrel, causing notable financial strain. The question remains—will they continue to drop? Much hinges on how Iran’s military and authorities respond in the upcoming days. Will the Strait of Hormuz see increased tension, or will U.S. naval support allow tankers to navigate safely through the area?
Answers to these questions, along with how media narratives possibly influence traders’ decisions, will be critical to watch.
