The purpose of liquidity in financial markets is to enable price discovery. But when super-fast computers take over the trading, that purpose disappears. Instead, we have today’s “correlation trading“.
Olivier Jakob of PetroMatrix demonstrates this with the above chart, which shows Tuesday’s detailed trading patterns in WTI and the Dow Jones Index. Clearly, they are simply trading in tandem on momentum, with no regard for real fundamentals or market sentiment.
This creates a very high risk scenario for chemical companies. As Jakob notes, we are now in “a situation where no single market knows exactly what it is pricing”. Real supply/demand balances for crude oil are irrelevant to these computers, and the traders who drive them.
But, at some moment, probably not too far away, fundamentals will reassert themselves. Higher oil prices destroy demand. Already, consumer confidence is falling, even whilst stock markets (normally a positive driver) move higher.
Prudent CFOs and business managers should be alarmed by what is happening, and take the necessary avoiding action. It will all end in tears.