Yesterday's furious selloff in crude prompted even more confusion amid the trading community, recently whipsawed by seemingly chaotic moves across all asset classes, and desperate for the reason behind the sharp dump.

Some, such as DB's Jim Reid attributed the violent selling to the publication of Saudi Arabia's budget plan, which as we discussed overnight includes ambitious oil revenue targets of $177 billion for next year. To reach that number, the Kingdom is either assuming very unrealistic oil prices of around $80 per barrel, or it plans to pump more than the 10.2 million barrels per day target agreed earlier this month. Since the $80 per barrel figure is around 30% more than consensus estimates, the latter scenario looks more probable, which would equate to a significant increase in global supply and would end up being more bearish for prices.

Others speculated that in the same vein as commodity trader Pierre Andurand, who closed out most of his positions after suffering a historic loss in 2018, the selling was merely hedge funds liquidating deep underwater positions ahead of the new year.

Now, according to a third theory - and one which Treasury Secretary Steven Mnuchin would approve of - Nomura is blaming the sharp sell-off in WTI on algo-investors such as CTAs and RiskParity funds, which in recent times have become the go-to scapegoat to explain any otherwise inexplicable market moves.

According to Nomura's Masanari Takada, CTAs quickly swept away the small amount of long WTI positions they held and flipped to the short side by selling WTI crude futures. Furthermore, Takada notes that the "actual" speculative position data released by the CFTC as of last week shows that not only systematic trend-followers like CTAs but other short-term investors also cut their existing long positions aggressively.

(Click on image to enlarge)

As Nomura further adds, selling of commodities by RiskParity investors for the purpose of deleveraging is one such example of existing long positions. Apart from a regular rebalancing which tends to occur during the final week of the month, RiskParity can also adjust their portfolio leverage ratio at any time given changes in overall market volatility. As a result, the Takada currently identifies some selling pressure on the broad commodity market, mainly in crude oil futures, from quick sales by RiskParity funds that are “long-only”, to reduce their leverage ratios.

(Click on image to enlarge)

The silver lining, for oil bulls, is that if indeed this was a forced liquidation by the quants, with much of the selling overhang gone, any reversal in price momentum will quickly see the CTAs reverse their bias and start buying to the upside, forcing a short squeeze in the process, and restarting the entire price cycle from square one.