Speculators are once again fleeing the oil market, setting the stage for more extreme price swings. 

Money managers dumped their net-bullish oil holdings by 19%, the biggest drop in six weeks. The positions are now at the lowest seasonal level in more than a decade.

The exodus comes amid another crash for oil, driven by concerns over the economy. West Texas Intermediate futures have tumbled for three straight weeks, even briefly plunging to the lowest level since late 2021. 

With investors rushing for the exit, it’s drying up liquidity and leaving the markets largely in the hands of algorithm or momentum-based traders — a scenario that often creates even more volatility, said Michael Tran, managing director at RBC Capital Markets LLC.

“In short, the oil market needs more players on the field,” he said.

Money managers’ WTI net-long position, or the difference between bearish and bullish bets, dropped to 157,047 contracts in the week ended May 2, according to data released Friday by the U.S. Commodity Futures Trading Commission. The speculators’ share of open interest, a measure of market participation, is near the lowest level in three years.

Without speculators, prices can become disconnected from supply and demand drivers. That can create pain for hedgers, merchants and producers who can’t walk away from the market even when its moving counter to what physical fundamentals dictate. Implied volatility already recently climbed to the highest in more than a month.

This kind of exodus has driven extreme price swings in the past. 

Last year, a combination of higher collateral requirements and rising interest rates dented demand from speculators who sometimes use oil as a hedge against inflation. The sapping liquidity caused increasingly erratic intraday price moves. By the end of the year, more than $120 billion poured out of global commodity markets. 

Part of the reason oil speculators are staying on the sidelines is that they have been repeatedly burned. For example in early April, they were holding a very large short position, or bets on falling prices. But Saudi Arabia and allies, known as OPEC+, announced surprise production cuts that sent prices surging, leaving many investors wrong-footed. Instead of buying back into the market with long holdings or new short bets, the money managers have decided to instead stay on the sidelines. 

WTI settled on Friday at $71.34 a barrel. Earlier in the week, the price touched $63.64, the lowest since 2021. 

For bulls to return, it will likely take both signs of a meaningful slowdown in Russian output along with a sustained recovery in Chinese demand.

Ultimately, when the oil market struggles, it can also pull other commodities lower as traders get margin calls across the sector, said Carley Garner, a Commodity Broker and Strategist at DeCarley Trading. 

“We’re not there yet, but if oil drops below $63, it will cascade in other markets — even stocks,” she said. “Oil lures speculators when prices move higher. They need to see a more rational market.”