Are Too Many Trying To Pick Oil's Bottom?

Includes: DIG, OIL
by: Marc Chandler

Speculative longs have been picking a bottom to oil for the past two months.

Are they early or wrong?

Watch $47.50 basis the March contract.

At the end of last year, many analysts were predicting a recovery in oil prices. As January progressed and prices continued to fall, forecasts were revised lower. However, speculators have other ideas.

This Great Graphic was composed on Bloomberg using data from the CFTC and the futures exchange. It shows the price of the generic oil futures contract in yellow. The white line is the gross long positions in the futures market.

The longs were cut as oil price fell from July through November. However, since November, the gross longs have risen from about 400k contracts to nearly 500k. These can be understood as bottom pickers. The key question is whether they are right. They have drawn some comfort recently as oil prices have retraced this year's decline.

The gross long position is now as large as when oil was near $100 a barrel. The risk is that there new longs are in weak hands (in the sense that they do not have much cushion in price and required margins have been increased) and may need to be washed out before oil makes a more convincing low.

What levels should be monitored to see if there will be a capitulation of the longs. Basis the March futures contract, a break of $49 a barrel would be an early warning sign. A move below $47.50 would like signal a move to new lows. From a fundamental vantage point, the idea is that output in excess of demand has not peaked. US inventories are still rising. The broadening industrial activity at refineries will exacerbate this in the near-term.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.