“Woe to the land whose king is a child and whose leaders are already drunk in the morning. Happy the land whose king is a nobleman, and whose leaders work hard before they feast and drink, and then only to strengthen themselves for the tasks ahead”. (Eccl 10: 16-17)


"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat


Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput






Friday, January 10, 2014

COT Sweet Crude Oil

The following chart is for the reader who had a question about the Commitment of Traders report for the Crude Oil market ( WTI ). I must also confess that I have not been tracking the composition of the trading positions in this market but have rather just been noting its price action.

Given the fact that crude oil is essentially trading at the exact same level as it was to start of the past year of 2013 - near $92/barrel - it is quite remarkable to note the positioning of speculative money in this market.


Note that price had a strong rally during the 3rd quarter but then peaked out in early September and crashed from above the $110 level to its current $92. That is a fairly substantial move lower in price. Yet, look at the positioning of the speculators. They remain as net longs, every single category of them!

Here is a chart of the Commitment of Traders beginning at 2013 through this Friday's report. This is for Futures and Options Combined.


The hedge fund category did peak in their net long exposure around that same time frame but they are certainly not on the net short side of this market.

What is interesting to see is that as price has moved lower, the Producer/Merchant/User category, usually big commercial interests, have been net sellers. That tends to go against the usual pattern of commercial buying into descending markets with hedge fund or large spec selling.

It is obvious that the big shorts in this category are the swap dealers. That too is rather remarkable.

Quite frankly, I do not trade the crude oil market in size and thus am not that familiar with its inner workings as I am with the other markets that I specialize in. Yet, this is certainly odd as the trend following speculative money, money that one would tend to think would be on the side of the trend, which has been lower since September, has not been in this market. They clearly are net longs in a downtrending market. If anything the Hedge fund net long position is still very large. I do not know what to make of this.

I thought it might be tied to spread positions against the products but in checking their COT reports, the hedge funds are also net longs in both the Unleaded Gasoline markets and the Heating Oil market.

Hedge funds are net shorts on the WTI-Brent Spread but not to the degree to offset the totality of exposure to the WTI futures market.

Maybe if any of the readers here are specialists in the Crude market they can help us understand this. But for now, it is something that I am unable to explain.

I do recall that the opening of the pipeline out of Cushing to Port Arthur brought a lot of speculative money into the crude oil market as the belief was that pipeline would help alleviate the glut of supply that has been plaguing Cushing for some time. Yet, crude prices have already given up any gains tied to the news of that particular pipeline opening.

Fracking has given us large supplies of crude, a good deal of which is being refined into products and exported abroad but still the trend in the market has been down, in spite of speculators remaining as net longs.

I am going to be monitoring this situation as the weeks unfold to see I can make any sense out of this and see if there are any clues in here that we can glean as to what might be happening to this very key commodity. Under normal circumstances, an improving economy would lead to an increase in demand for energy which would be reflected in stronger demand for crude and its products but the chart is not reflecting that at the moment.

In today's price action the abysmal jobs number resulted in higher crude prices, a counterintuitive move that can be understood as a play on the Fed holding off on any tapering yet if the threat is one of deflation due to poor demand tied to weak payroll growth, then why the bounce higher?

Maybe we can figure this out; then again, maybe we can't.... That is why I prefer to trade markets that make some sense to me.

14 comments:

  1. Dan,

    Thank you so much for taking the effort and time to look into this as I have been struggling to find the answer to this myself. I have been monitoring the crude oil market for only a few years but have never come across something like this before in which the speculators are still near the yearly highs and yet price has collapsed so much.

    I wonder if this is a warning sign for this market that is still quite crowded on the long side, so if there was a correction on the horizon in risk assets especially equities, how vulnerable and sharp the oil market will be to follow to the downside.

    Thanks again Dan for your analysis.

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    1. Jesse brought up the possibility of a sharp fall in the stock markets and the potential consequences to the crude prices. What keeps me up at nights are the potential repercussions that such event would cause on commodities in general, and PMs and miners in particular. By repercussions, I mean the short-term ones. Is it likely that a sharp 20-25% correction in S&P would cause the dollar to strengthen and commodities to fall down immediately and then work its way up (not unlike 2008)? Or, is it likely that the stocks and PMs (together with the miners) would, in such a scenario, diverge and each go its own way?
      I apologize if this was discussed here already.

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  2. Abraxas that's exactly it. Look at the DOW and gold in June - Oct 2011, they both came down hard after a good run post 2008. I think cash will be king here in the short term, this should allow gold to bottom and the DOW to correct then it's off to the races for both as the bond market will continue it's decline.

    And as usual the gold bugs are ramping up the propaganda machine on the poor jobs numbers. If you look at the history of non-farm payroll it's not unusual to have a big miss every several months and usually this is due to some circumstance. But consistently the numbers have been on par with pre 2008:

    http://ycharts.com/indicators/us_change_in_nonfarm_payrolls

    I don't think this is reason enough for the Fed to cancel the taper, especially since unemployment dropped anyway.

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  3. @ Gene

    I think it is widely known by many in the industry that the numbers don't add up. What we need to ask ourselves is what TPTB intend to do about it going forward (whether that be in the short term or over a longer time frame). I personally believe this economy is not firing on all cylinders or at least ramping up as we have been led to believe. Oil is certainly not the only commodity to have had a correction in the last 6-12 mos as many currencies like the CAD have mirrored. In fact, many of the charts look downright bearish to me, which is a serious red flag. Having said this, if you factor out the large move we saw in oil in Dec, then it's correction actually appears less bad. IMHO, the longterm trend is still intact having only been breached once in recent memory (ie. during 2008-09). Perhaps oil is (or will be) getting a gold/silver style beatdown in the coming months? Anything is possible in these crooked markets. If the taper talk continues I believe oil prices will ultimately fall out of bed, however, equities will certainly go along for the ride with it. At some point gravity will take hold. So, what we have to ask ourselves is whether this is all another engineered small to med sized reset of sorts (stocks excl of course) before Yellen plays the "untaper" card and we muddle along on business as usual (ie. a repeat of 2011, 2012, 2013...), markets continue to grind higher, defy gravity etc OR have things finally been pushed so far to the extreme that only an Abe style manoeuvre can save the S&P from a catastrophic collapse back to 2008-09 levels and beyond? If it is the latter, then things must get worse first (actually much worse) to warrant a dusting off of the "bazookas", which we were led to believe aren't needed anymore because everything is hunky dory now. IMHO, much of this is really confusing to me too, however, it is obvious that this is becoming a much more fluid situation that could turn on a dime at any given moment. For the time being, I'll assume this is all noise and things continue on business as usual.

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  4. Thanks for your thoughts bullwhip. What you say makes sense to me.

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  5. Dan,
    Thanks as always for your excellent analysis.@ bullwhip 29 - thanks. It's interesting that the trend for WTI has been up since 2009 (though lower highs since 2011), even as US oil production has increased over 50% to over 7.5 million bpd since hitting a low of 5 million bpd in 2008. (I can't help but think that this has driven the US recovery 100x more than QE). Add to that largely land-locked Canadian production, which has also been increasing annually from tar-sands & unconventional plays. Great for the USA. From what I've read, the shale oil fields are, on a historical scale, equivalent to the North Sea or GOM discoveries of the past: they contribute to world oil production, but are not 'a game changer' on a worldwide scale (see link below).

    @bullwhip29, I think you're right that oil could "fall out of bed," based on the trend line (triangle formation from 2008 peak/ at bottom of trendline now). Though it's possible to engineer a 'reset' in oil --with bearish commodity sentiment driving speculation to crash prices...that's not what the commitment of traders shows. I can't imagine that the govt. would want a reset for two reasons: dis-inflation in the face of QE looks like an abject failure and the oil renaissance in US oil production depends on not breaking the back of oil.

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    1. Another way of looking at it is WTI shouldn't go too much below the cost of Brent / world oil price less the cost of transportation to a deepwater port ($17-$20/barrel to ship by trail according to the financial post) for an extended period of time.


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    2. Dan,

      I saw this post. My only suggestion, as always, is follow the cycles of concentration. I know you probably hate that response and my charts. The oil market is still displaying bearish concentration that is more likely to be unwound into weakness than strength.

      COT review of Oil

      http://edegrootinsights.blogspot.com/2014/01/cot-technical-review-of-crude-oil.html

      Take care,

      Eric

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  6. Wow, the collapse of the reputations of the "Peak Oil" pushers is quite remarkable.

    After listening to Matt Simmons back in 2004, I would have figure crude would be at $175 and gasoline over $5/gallon by now.

    Instead we are experiencing the exact opposite.

    New cars churned out by Detroit are getting unbelievable gas mileage.

    New oil production in the U.S. is skyrocketing. Just wait until they open up new open water drilling after Obama leaves office.

    Poor Jim Puplava had to take the 150+ books he read on Peak Oil and throw them into the dumpster.

    Kunstler is going to have to live with "happy motoring" suburbia for another 20 years at least, LOL!!!

    The U.S. is the envy of the world.

    Ultra cheap and abundant energy, interest rates near zero, an accomodative Fed, and soaring stock markets.

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    1. Mark,

      He! He! (I just projected an image of Jim Puplava's disillusioned sad face while tossing out those books). May I sum up your post in two words: Perpetual prosperity!
      .

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  7. Hey Dan!

    Do you know what has happend to the KWN Weekly Metal Wraps. They got still posted on the HP every week, but apparently there is no audio upthere for for a couple of weeks now?

    Cheers

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  8. GOLD: A double bottom ? Not just yet bet getting close.
    http://www.st.com/web/catalog/sense_power/FM142/CL1015/SC312/SS1731/PF208878?s_searchtype=partnumber

    If it can hit 1270 in next few days and stay above 1265 that should do it.

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  9. GOLD: Double Bottom? ( I posted an incorrect link above -- happens !)
    http://www.kitco.com/news/2014-01-13/KitcoNewsMarketNuggets-January-13.html

    Also go moves on high volume today on GDXJ, IAG, FSM ,SA etc

    ReplyDelete