Discussion: The Future of Oil Commodity Trading

Without doubt, Oil Commodity trading will continue to be a mainstay of the financial markets for the foreseeable future. Will, however, a seismic shift in the geopolitical landscape, towards sustainability, impact liquidity such that oil market dynamics change in the long run?

Overview

Alternative uses for oil are easily overlooked, and the focus of sustainability is often on the impact of pollution from various modes of transport. However, one 42-gallon barrel of oil creates 19.4 gallons of gasoline, the rest is used as a component of products from golf balls, sunglasses and cameras to dentures, anaesthetics, artificial limbs and bandages. 

I reached out to Renata Lee whose passion is everything oil, to discuss the future of Oil Commodities, and we concluded that a market for oil trading is not in any immediate danger of extinction. Notwithstanding that, a leading indicator of the tenability of oil markets will be the correlation between liquidity and volatility. A shift towards sustainability, and the increased importance of alternative energy commodities such as Lithium, could reduce liquidity in the oil market, increase volatility and dis-incentivise participation. Speculators are discouraged by less liquidity, as it means increased trading costs through wider spreads and elevated risk.

Having spoken with Renata, we discussed the question, “Should the market be concerned at this stage?”

Our simple answer is “No.”

Discussion

Nevertheless, would it be naive to set aside the morality of speculators and focus solely on financial reasons for abandoning the oil market? Or, is one a precursor to the other?

Clearly, all commodities associated with sustainability are equally hostage to the global geopolitical and macroeconomic landscape and current changes are prompting earnest discussion around the future of oil trading. 

We see global trends pointing towards long-term de-emphasis of oil in favour of alternatives. Most obviously, the geopolitical implications of Joe Biden’s successful election campaign and the UK’s announcement of a ban on the sale of petrol and diesel cars from 2030 are marquee sustainability stories. We see from the initial market reaction that this could be further enhanced by renewed talk of a “blue wave,” as we awaited confirmation that Democrat’s Raphael Warnock and Jon Ossoff had successfully unseated their Republican counterparts, in Georgia. The NASDAQ was down 135 points over night and T-notes down 15 ticks, which suggests that Democrat control of the senate will allow Biden to provide stimulus, increase regulation AND pursue his stance on future sustainability. Notably, Nissan have joined GM in their change of allegiance from Donald Trump to support of Joe Biden’s “vision for sustainability”. 

Although not imminent, Mark Lewis’ (chief sustainability strategist at BNP Paribas Asset Management) suggestion that “this is a make-or-break decade in the battle to prevent catastrophic and irreversible climate change,” implies the noose is tightening around heavily polluting industries and therefore oil speculators may need to begin considering alternatives.

The FT.com reported in December 2020 that the cost of polluting in the EU continues to rise. We saw carbon price hit a record high on the EU Emissions Trading System (EU ETS) of 31 Euro a tonne.

 

Thoughts

Perhaps the key question might be whether public perception and macroeconomic events, influenced by a progressive global geopolitical stance, will lead to a moral and subsequent financial discouragement which culminates in reduced liquidity and increased volatility, forcing speculators to abandon the oil market in its current form? 

Oil Updates:

If you’re interested in following the oil market more closely, I would recommend registering for Renata Lee’s daily oil updates via lifewithrenata.com. She has a passion for oil that is clear to see in her work and she produces clear and concise information prior to the trading day ahead.