In recent weeks, global oil prices have experienced violent fluctuations, with each reversal affecting investors' nerves.

On Monday of this week, the price of oil once rose above $80 per barrel, but on Tuesday, the price of oil plummeted by 5%. As of yesterday's closing, Brent crude oil was reported at $77.06 per barrel, still failing to break through the $80 mark.

So, what exactly happened?

CTA catalyzes the decline in oil prices

Turn the clock back a few months, and the market encountered an epic algorithmic sell-off. The plummeting price of oil is "inextricably linked" to the CTA (Commodity Trading Advisors) funds in algorithmic trading.

These funds trade by analyzing complex technical factors, such as the term structure of Brent and WTI prices, rather than based on fundamental factors such as macroeconomics or geopolitics.

Ryan Fitzmaurice, portfolio manager and strategist at Marex Commodities Investment Portfolio, said:

"CTA has been the dominant force this year."

Earlier this year, the decline in U.S. inflation led to many "sticky funds" "fleeing" the market in April and May. Coupled with OPEC's plan to increase supply in December and weak global demand, the price of Brent crude oil plummeted, sliding from over $90 per barrel in mid-April to just under $70 per barrel in mid-September.Additionally, trend followers actively buy when prices rise and actively sell when prices fall, further accelerating this selling process.

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The "risk premium" triggers the initial rebound

Subsequently, as the People's Bank of China released the "policy package," the situation between Israel and Iran intensified, and market sentiment shifted. Due to concerns about disruptions to Middle Eastern crude oil supplies, oil prices once "reversed" and surged significantly. Morgan Stanley commodity futures and options strategist Tom Skingsley wrote in a report that the initial rebound was "almost entirely caused by (reasonable) risk premiums."

Investors who had been on the sidelines for months began to purchase oil futures and call options to hedge their broader investment portfolios, thereby breaking the momentum that drove the CTA sell-off.

Last week, Brent crude oil recorded the largest five-day gain in more than a year, with a weekly increase of over 9%.

However, Bouchouev, former president of Koch Global Partners, believes that,

"Investors have become 'bullish,' but they don't really want to buy in. They have no incentive to do so before the U.S. election. Some people are actively buying $100 call options as insurance because no one really knows what will happen in the Middle East. What people do know is that if oil prices really rise to $100, the Federal Reserve's plans will be disrupted, and other assets will be greatly affected."

The situation remains unclear, and oil prices may fall again.But in the past few days, the market has once again undergone earth-shaking changes. On Tuesday, China's National Development and Reform Commission held a press conference, and the Middle East tensions did not escalate as expected. Oil prices experienced another reversal, plunging by 5% on Tuesday.

JPMorgan analyst Skingsley released a report on Tuesday stating:

"Before Israel takes clear action, it is still difficult for us to make a judgment. However, considering the rebound we have seen and the fact that it is almost entirely caused by (reasonable) risk premiums and positioning, if Israel's response is 'disappointing' (i.e., it does not affect the oil balance/targets nuclear facilities), then there is still a lot of room for oil prices to fall."

It is worth noting that on Tuesday, companies such as Total Energies also joined the oil market sell-off. However, for several months, Total has alternated between being a buyer and a seller every few weeks...

When will the next reversal occur? It seems that no one can be sure.

Marex's Fitzmaurice said:

"This is an endless cycle. But CTAs are not necessarily so concerned about OPEC or the prospects in the Middle East. They are just trying to make money by exploiting momentum."