Mother Nature can be a cruel mistress sometimes, as large parts of the US discovered last week when it was left reeling by Hurricane Ida. The first major hurricane of the year to significantly impact the oil activities in the Gulf of Mexico knocked out more than 90% of the region’s offshore oil production. Around 1.7 mbpd has been shut-in while a total of 2.3 mbpd of refinery capacity was taken offline. Yet while the bulk of production remains offline, refineries are restarting operations despite widespread power outages. The lag in offshore production means that US crude stocks seem likely to fall in the coming weeks.

Away from America’s hurricane woes, OPEC+ stuck to its guns by green-lighting a previously agreed 400,000 bpd increase in output this month. The widely expected move comes as near-term demand fundamentals continue to improve even in the face of the Delta threat. That said, the alliance sounded the glut alarm bells for next year after predicting a return to a surplus market. Returning to the here and now, OPEC+ expects the market to be in deficit at least until the end of 2021. The upshot is that OPEC and its allies will likely stick to their existing policy of gradual oil output increases for the remainder of the year.

On the economic front, the big takeaway from last week was that the US jobs machine took a breather in August. Friday’s non-farm payroll report revealed that 235,000 jobs were created last month after surging by more than a million in July. Economists had forecast private payrolls would increase by around 730,000 jobs. The disappointing US jobs report has raised fears about the pace of economic recovery while at the same time supporting the case for dovish monetary policy. Even so, the Fed is still likely to signal the imminent start of stimulus tapering when they meet later this month.

An eventful week made for erratic price swings. Ultimately though, the crude scoreboards were little changed. Brent and WTI eked out a modest weekly gain. All the while, the refined products complex was the star performer as it benefited from the hurricane-related disruptions. Judging by last week’s price action, volatility is set to remain a familiar theme in the final third of the year. But as we discuss below, this does not necessarily translate into heightened levels of trading activity.

A head scratcher

There are no prizes for guessing the driving force behind the latest surge in price volatility. Speculators have been more active than usual in repositioning their portfolios. Bullish bets on CME WTI shrank by 35 million bbls to 278 million bbls in the four weeks to August 31. Over the same period, net speculative length in ICE Brent declined by 32 million to 272 million bbls. In both cases, the pullback in NSL was driven by a liquation in length. That being said, the number of long positions still exceeds gross shorts by a ratio of 6:1 on WTI and 5:1 on Brent.

Alongside this flurry of speculative activity was a bout of repositioning by producers and merchants. Earlier this year, US shale producers rushed to hedge against persistently low prices. However, oil prices have since recovered to pre-Covid levels leaving many stuck selling at pandemic-era prices. Consequently, some shale players are racking up hedging losses. According to BloombergNEF. shale explorers are facing almost $12 billion in losses this year from bad bets. Small wonder, then, that producers have started to abandon hedges. In the four weeks to August 31, producers and merchants went from being net short 21 million bbls in CME WTI to net long 31 million bbls. This marks the first time they are net long since the start of the pandemic.

Clearly, investors and producers have been busy readjusting their holding of crude futures contracts. Yet these changes are at odds with a drop in trading activity. Exchange data for August shows that CME WTI average daily volumes (ADV) stood at 928 million bbls, down 8% from the previous month and the second-lowest monthly average of this year, All the while, the decline was even more pronounced on the European crude benchmark. ICE Brent ADV reached 843 million bbls last month, down 10% on July and lowest monthly average of this year.

And it’s a similar story so far this month. The onset of September has triggered a further pullback in trading activity despite a choppy price performance. ICE Brent ADV eased to 766 million bbls in the August 30 – September 3 period. The combination of price volatility and relatively subdued trading activity is surprising, to say the least. Whether this unusual trend continues remains to be seen. What is needed to reinvigorate trading volumes is a major risk event for the energy complex. Yet these are set to be far and few in between in the year-end period.