The U.S. Commodity Futures Trading Commission released the Commitment of Traders (COT) report today and it suggests that the collapse in WTI Crude Oil (USO) prices is imminent. This is despite WTI Crude breaking through a key technical level in today's trading.
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Below is a chart of WTI Crude Oil's 1 year price history along with COT data.
I've circled where large speculators and managed money have reached peaks in long oil positions. During the past year, every time this has happened there has been a fall in oil prices. Each time this fall has been drastic, with oil reaching the $86 range. This market behavior is logical as if majority of the large speculators are holding long positions, eventually sellers will outnumber buyers pushing prices downward.
The data from the COT is even more informative when examined over longer time frames. Below is the same chart on a weekly basis for the past 5 years.
Over the past 5 years, producers have been gradually increasing their hedges, reaching a climax in the beginning of 2011. Given that producers are privy to more information than speculators, especially with regards to future production, the extreme hedged position they reached this past Tuesday is worth taking note of.
On a 25 year chart, the drastic divergence in 2011 is put in context.
The timing of hedging by producers is no coincidence. U.S. Oil production took off in 2011 in conjunction with hedgers locking in prices. I suspect this was in anticipation of lower prices which have yet to materialize in the midst of QE.
This pattern of producers hedging ahead of supply increases is not a new phenomenon. The exact same price action was seen prior to the boom that collapsed natural gas prices.
This hedging by producers coincides with the beginning of the dramatic increase in U.S. production of natural gas.
The Bottom Line
It is not a question of if oil prices are going to fall, but when. If the lag in price action that occurred with natural gas repeats itself, the increase in hedging by producers is signaling that oil prices will adjust in the near future. In addition, with large speculators heavily long, there are few speculators left to continue to bid up the price, and eventually they'll want to book profits, bringing on a wave of selling.