Good morning, here's what the Oilman has for you today:

• Algos Are Running the Oil Market

• Saudi May Abandon $100 Oil Price Target

• Tweet of the Day

Algos Are Running the Oil Market

Speculators are betting on lower oil prices at a record pace.

The unprecedented trend has confirmed something many have suspected.

The oil market is no longer run by traders.

It’s run by algorithms.

A house of cards worth billions

They’re called CTAs, or commodity trading advisors.

These advisors don’t care about fundamentals.

They care about supply forecasts.

And they care about so-called technical data.

This means price charts.

These are fed into software that then tells you when to buy or sell.

It also tells traders where oil prices would go—based on those forecasts.

And we all know how reliable forecasts are these days.

What could go wrong, right?

Well, for starters, the algos have pushed Saudi to drop attempts to push prices up.

They have also discouraged U.S. producers from expanding output.

Why bother when prices are set to fall further?

But there’s another problem, too.

Algos are driving whole groups of traders out.

Traders who use oil as a hedge against inflation? Gone.

Discretionary traders, who use more info than just forecasts? Gone.

A distorted market

What we get as a result is a highly distorted market.

For a vital commodity.

That’s dangerous.

Because algos can just as quickly amplify rallies as they amplify drops.

And they have already done it.

Price volatility is at a whole new level.

Worse, the gap between physical oil and the futures market is getting wider and deeper.

This leaves a lot of space for nasty surprises for producers and consumers.

Saudi May Abandon $100 Oil Price Target

Saudi Arabia is preparing to abandon its price target for crude oil.

That’s the price the country needs to balance its budget.

It was $100. And now it appears beyond reach.

That’s bad news for oil producers everywhere.

A moment of resignation

The info has yet to be confirmed.

It comes from “unnamed sources” of the Financial Times.

They say the Saudis are planning to start bringing back supply in December.

They want to regain some lost market share that resulted from the cuts.

Well, it was never going to work forever.

The Saudis are just realizing it now.

If they start returning barrels to the market, prices will take a plunge.

Even if no other OPEC member reverses the cuts.

That means Saudi is ready to endure some pain.

And that means it would inflict pain on others as well.

Even if this time it doesn’t mean to. Maybe.

Remember how the Saudis tried to kill U.S. shale?

That was how they did it: they flooded the market with crude oil.

Now, they’re doing it to save market share.

But the effect on higher-cost producers could be dramatic.

Shortage on the horizon

Low prices mean low profits.

Low profits mean lower production down the road.

But low prices also mean higher demand.

Higher demand and lower production are a recipe for higher prices.

That’s the nature of the oil industry, and it’s not changing.

We’re heading for an oil shortage.

Tweet of the Day

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