-- Financial oil markets have expanded by the equivalent of about 1 billion barrels per day in derivatives trading volumes, even as global physical oil supply has fallen by over 10 million barrels per day since the start of the Gulf war, according to Oxford Institute for Energy Studies analyst Ilia Bouchouev in a Tuesday note.
In a commentary on market dynamics during the ongoing crisis, Bouchouev said trading behavior across options, futures, and hedging flows has shifted sharply as volatility in physical crude markets intensified.
He said hedge funds have at times reduced net futures exposure, with risk allocations shrinking as volatility rises. Some discretionary funds have also moved to the sidelines, citing difficulty in meeting performance targets under current conditions.
As hedge funds pulled back, other participants have taken a more prominent role.
Oil producers have increasingly sold longer-dated futures via swap dealers to lock in elevated prices, while participants positioning around US Strategic Petroleum Reserve releases have traded spreads between short- and long-dated contracts.
Options traders, meanwhile, have also contributed to recent selling pressure by taking profits on earlier positions.
Bouchouev said these flows have contributed to a growing disconnect between physical oil prices and benchmark futures such as Brent and West Texas Intermediate, with derivatives activity increasingly shaping short-term price dynamics.
He added that while some financial traders remain structurally bullish, expressing directional views has become more difficult in highly volatile conditions, where small position shifts can lead to outsized portfolio impacts.
However, he cautioned that sentiment could shift quickly. Any escalation in geopolitical tensions in the Middle East could trigger renewed call option buying and a fresh wave of bullish positioning.
He also noted that although financial oil markets are significantly larger than physical crude markets, they remain small relative to global equity and bond markets, leaving room for spillovers from broader macro-financial conditions.
The derivatives market for refined products, he added, remains structurally imbalanced and sits at the center of current pricing distortions.