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.

Hedge Fund Short Squeeze Continuing in Gold

Since the last week of 2013, through Tuesday of this past week ( 1-7-2014), Gold has rallied from the vicinity near $1180 to a high near $1245 reached Tuesday. That is some $65.

It is no coincidence that over that same period, the hedge fund category has covered nearly 8,000 short contracts. As of the week of Christmas last year, hedge funds held a rather small net long position of some 28,702 contracts (futures and options combined). As of this Tuesday past, their net long position has regrown to 40,229.

To get to that point they have covered 7,345 shorts to be exact while adding 4,182 new longs over the period mentioned above. Another way of saying this is that the buying in the hedge fund category has been dominated by large short covering, not so much by fresh new long position taking.

While the results are the same, namely higher prices, I prefer to see a market dominated by fresh buying outnumbering short covering when I look for a trend to persist. Short covering can catch you off guard because it is so furious and comes in such large blocks when it tends to come. The problem is it can also peter out as quickly as it began.

Think of a market as a rocket engine taking off. It requires THRUST to counter the downward force of gravity. As long as the thrust persists, the rocket can move higher. If for any reason the rocket runs out of fuel, gravity takes over and back down it will come.

Gold can be likened to a rocket that is being driven higher AT THIS TIME, by thrust coming from short covering which is the dominant feature. This short covering needs to be replaced by FRESH BUYING to keep pushing it higher.

That fresh buying will only come as upside resistance levels on the chart give way since that movement generates momentum, which is what the hedge fund computers are looking for. Remember, they do not care which direction the momentum is taking a market, up or down alike make no difference. All they care is that the momentum is present.

That brings us to the price chart. This short covering on the part of the hedge funds has taken the market very near to a strong resistance zone on the price chart ( $1255 - $1260). It will be up to the bulls next week to take price through this zone if they are going to create a trending move in the metal to the upside.

I will be honest and say that I am dubious as to their ability to do this but one thing I have learned is that the market could care less what I think it might or might not do. The last two years of Fed bond buying programs have not undercut the Dollar nor have they generated any strong buying across the general commodity sector. If anything, that bond buying has served to reinforce the idea that the economy is too weak for the Fed to cut back on the QE. During that time, deflationary pressures have dominated and we all know what that has done to gold by now. I see no reason to believe that another year of unabaged Fed bond buying is going to produce anything other than what we have already seen in the last two years.

Only recently did the FOMC start up with the talk about tapering. That talk was based on the Fed's view of a gradually improving economy with a bit of an improvement in the labor markets. November's strong payroll numbers fed into that thinking doing nothing to dissuade the Fed from acting to Taper.

Today's weak payrolls number, coming as so shockingly poor as it did,  rekindled the idea of a Fed on hold when it comes to tapering. If we get subsequent economic data that comes in strong, or stronger than expected, look for that notion to begin withering away again.

I am especially interested in watching interest rate yields on the Ten Year Treasury at this time. Any further rise there should support the Dollar and bring pressure to bear on gold. Conversely, if the yields begin sinking lower on the Ten Year, gold should be able to catch a bid and remain firm.

The sharp rise in the GSCI today is evidence to me that the Dollar holds the key to the overall commodity sector as far as these speculative money flows go. When I survey the general global economy and compare the economic status of the major nations of the West ( I am including Japan in that block), the US still seems to be experiencing the best "growth" out of the bunch. That would lead me to believe that if there is going to be any nation out of that group that can see interest rates move higher, it is going to be here in the US. This should bring buying into the Dollar which should tend to bring pressure across the commodity sector in general. But as always, that is a view that must be confirmed by price action.

Next week is therefore an important test for this market.

Have a good weekend all....

Go Hawks...

Dollar Drops; Commodities move Higher

Almost like clockwork, the abysmal payrolls number undercut recent strength in the US Dollar. Just like that -   up went the Goldman Sachs Commodity Index. Tell me that the Dollar is not the key to the complex!

It did not hurt that index one iota that the USDA issued a shock report today which contained a bullish surprise for corn prices. It was not that the number they gave us was so bullish; rather it was that no one expected it. The market was leaning heavily on the short side and the pencil pushers over at USDA threw everyone a curve ball.

Quite frankly I do not believe the final number that they gave us. It is what the market has to work with however for the time being, and thus we experienced a gigantic short squeeze in corn that helped keep wheat from falling completely off the cliff, as the USDA number for that grain was decidedly bearish.

The soybean number was also unfriendly as they showed a bit larger crop than the market had been expecting but it was the huge buying in the corn pit that tended to pull money into the entire grain complex. That prevented the beans from selling off on the report.

On top of that you had coffee moving higher, hogs moving higher and the liquid energy complex moving higher. Base metal copper was higher. Given that environment to expect silver or gold to move lower was unwarranted. As a matter of fact, we had a pretty substantial short squeeze in the gold market to accompany some of the short squeezes across the generality of the sector.

Gold has now completely recovered its losses from the "fat finger" trade of Monday to the point that any discussion about the particulars of that event are moot at this point. I stand by my contention that it was an erroneous trade but who cares at this point.

The lousy jobs number has given shorts reason for fear in gold and encouraged some more bottom picking in the metal. This is due to revived talk of a hold on any Fed tapering. However, it is now moving into a very strong resistance level on the price chart. Further upward progress, WITHOUT the accompaniment of a weaker Dollar and more upward price pressure across the commodity complex in general, is going to be much more contested.

Also, based on the strong November jobs number, plus the upward revision in today's report to that already strong number, today's numbers for December should be treated with a bit of skepticism, especially after private firm ADP gave us such strong numbers on Wednesday. A lot of time can pass between now and the next payrolls number but I would not be surprised to see that number move much higher, more in line with what we have been getting recently. If that is the case, look for any move higher in gold, based solely on ideas that the Fed will be on hold for Tapering, to meet with some aggressive selling on the part of the hedge fund community.

Bulls have the opportunity to try to take price up towards the last level of chart resistance I have noted between $1255 - $1260 or so. If they can best this level, they will have recaptured control of the gold market for the time being, at least from the daily or short-term perspective, and even have a shot at a quick run to $1280.

It is going to be educational to see how Asia responds to this price rise. Will the move up curtail some of the strong physical offtake we had been experiencing over there or will price-conscious buyers step away from the market to see if they can get the metal cheaper? We will find out.

A look at the weekly chart below shows the market still under the control of bearish forces, as it has been since late 2012. Today's move was a nice gift to the bulls but looking at the chart from this longer term perspective, it has FAR MORE WORK to do before changing the picture from one of bearishness to one of bullishness.  

Surprising Weak Payrolls number - What will the Fed do?

That is the question on traders' mind this AM as the jobs report detailing the December numbers shocked the market by coming in so low. The ADP numbers earlier this week had stoked expectations for a strong number above 200K. Many were looking for something closer to 250K, What they got instead was 74K.

Keep in mind that ADP ( a private firm) had given us a 235,000 number on Wednesday. Also, the November payrolls number was upwardly revised from the previous 203K to 241K. That is what makes the December number so shocking.

The labor participation rate continues to shrink and this is something that runs the very real risk of becoming systemic. Sure that tends to shrink the overall unemployment number but at what cost to the rest of society?

The reaction in gold was as dramatic as was the reaction in the US Dollar. As a matter of fact, there seemed to be a bit of a resurgence in the "let's buy commodities" trade across the sector based on the weakness in the Dollar.

Crude oil moved up $1.70 a barrel at one point. Most folks would scratch their head and say, "Duh?" on something like that but we have come to expect the goofy reactions we get based off of these numbers. The market, instead of reacting with concern over the poor numbers and the resultant lower demand for energy, instead looks over at the Fed and thinks, " NO way they are going to taper right now". No immediate reduction in funny money and thus no immediate drop in liquidity being provided. Weakness in the economy means lower interest rates - lower interest rates means weaker Dollar and "Voila!", let's buy commodities today.

The problem is that nothing has therefore changed on the perceived inflation front. I maintain that wages must increase and hiring must pick up if we are to see any signs of serious inflation arise. What today does is just refuel the fears of deflation.

Perhaps some in the market are thinking along the same line and coming to the conclusion that the Fed must also be worried about deflation reasserting itself and thus will ease back on the Tapering.

Who knows but if the last two years of bond buying by the Fed, and certainly the $85 billion/month coming out of the most recent QE4 program has not resulted in any serious inflation issues, why should we expect another 2 years, 2 months, etc of bond buying to produce any at all?

Given that backdrop, gold is still going to face headwinds as it needs to see confidence in the US Dollar eroding to mount a sustained move higher in price. Thus I see two drivers - one -the US Dollar drops sharply or - two- the economic data shows more rapid growth heating up inflationary pressures. Either way the result is the same as far as the inflation issue goes.

The metal is pressing up against the downtrending 50 day moving average, a key technical point that most traders watch closely. It has not been above this level since late October of last year and then it only managed to hold above this level for 5 days before succumbing to another bout of selling. My guess is that we can expect the same as we move ahead. I remain skeptical therefore about gold's fortunes but will respect what the chart action tells me. Right now, the jury is still out as the ADX shows a directionless market on the daily time frame.

Bulls are close to getting control of the market but are not there yet.