Crude Oil: Shorting Oil Is No Longer The 'Groupthink'

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Summary

Money Managers’ short exposure in WTI financial futures-plus-options is at the lowest level since the beginning of the downturn in oil.

Aggregate long exposure has also been increasing.

However, Money Managers’ net length stands at less than one-half of the mid-2014 level as measured by dollar exposure.

The Commitments of Traders report by the CFTC for the week ending December 20 shows continued short liquidation by hedge funds albeit at a reduced pace (which is not surprising, given that the short position has shrunk dramatically). Money Managers' aggregate short position in WTI futures-plus-options dropped by an additional ~8 million barrels during the week, posting a new 52-week low. (Among the Money Manager category, directional short positions are often carried by hedge funds which, in contrast to many other investment vehicles, tend to have flexible investment mandates.)

On the long side, Money Managers' aggregate long position in WTI futures-plus-options moved in the same direction, adding 8 million barrels to a total of 404 million barrels. (The long position is dominated by commodity investment pools and other "long only" investment vehicles but also includes hedge funds' directional long bets.)

The re-positioning by "fast money" in response to the outcome of OPEC's meetings in Vienna has largely run its course at this point and short positions are probably no longer a major factor driving oil price volatility (at least for the moment). However, if measured in the aggregate dollar amount exposed, Money Management's net long commitment in WTI futures-plus-options is less than one-half of what it was at the end of the previous upcycle in oil in mid-2014.

Futures-Only vs. Futures-plus-Options

In addition to reporting traders' positions in commodity futures, exchanges calculate traders' combined futures and options positions using delta factors. Long-call and short-put open interest are converted to long futures-equivalent open interest. Likewise, short-call and long-put open interest are converted to short futures-equivalent open interest. A trader's long and short futures-equivalent positions are added to the trader's long and short futures positions to give "combined-long" and "combined-short" positions.

In this review, my primary focus is on tracking changes in combined futures and options positions by traders, as options are an important and often material component of risk-taking (the combined futures and options charts in this note have a dark blue background). For those readers who are more used to tracking the CFTC's futures-only data, I have included a section that breaks out the futures-only positions by key trader category (the charts in that section have a light blue background).

I should note that excluding options does not change the recent directional trends observed in the futures-plus-options data.

Data Summary - Week Ended December 20, 2016

Combined Futures & Options Positions By Trader Category

Charts in this section depict changes in futures-plus-options positions for the following commodity trader categories: Producers & Merchants, Swap Dealers, and Other Reportables. Definitions of trader categories are provided in Appendix at the end of this note.

Futures-Only Positions By Trader Category

For readers who are more accustomed to following traders' commitments statistics in futures-only format, this section breaks out data for the following commodity trader categories: Money Managers, Producers & Merchants, Swap Dealers and Other Reportables.

Appendix: Commodity Trader Categories

CFTC collects data on large traders' positions in commodity futures and options on a daily basis from clearing members, futures commission merchants and foreign brokers. The aggregate of all traders' positions reported to the CFTC usually represents 70-90% of the total open interest in any given market. Select data are made public on a weekly basis.

The four categories of commodity traders discussed in the article above are:

  • Money Managers: A "money manager" is a trader engaged in managing and conducting organized futures trading on behalf of clients. This category includes registered commodity trading advisors (CTA); registered commodity pool operators (CPO); or unregistered funds ("hedge funds").
  • Producers/Merchants/Processors/Users: A "producer/merchant/processor/user" is an entity that predominantly engages in the production, processing, packing or handling of a physical commodity and uses the futures markets to manage or hedge risks associated with those activities.
  • Swap Dealers: A "swap dealer" is an entity that deals primarily in swaps for a commodity and uses the futures markets to manage or hedge the risk associated with those swaps transactions. The swap dealer's counterparties may be speculative traders, like hedge funds or traditional commercial clients that are managing risk arising from their dealings in the physical commodity.
  • Other Reportables: Every other reportable trader that is not placed into one of the other three categories is placed into the "Other Reportables" category.

The CFTC reviews information provided by large traders to determine the category in each specific case.

Please note that the aggregate of all long open interest is equal to the aggregate of all short open interest.

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ETFs: USO, OIL, UWTI, UCO, DWTI, SCO, BNO, DBO, DTO, UGA, USL, DNO, OLO, UHN, SZO, OLEM, OILK, OILX

Disclaimer: Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment, tax, legal or any other advisory capacity. This is not an investment research report. The author's opinions expressed herein cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own and consult a qualified investment adviser. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice. The author explicitly disclaims any liability that may arise from the use of this material.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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