Crude futures prices rose by $1.22/b (2.3%) higher in the week ending February 14th, (to correspond to the data below) to $53.20. Over the balance of the week, crude futures remained steady.
The Energy Department reported that U.S. crude and gasoline stocks each reached new record highs. There also has been no evidence of any net OPEC export cut to the U.S. Finally, U.S. crude exports established a new high since the crude oil ban was lifted a little over a year ago. This was the context in which traders were rebalancing short and long positions during the week.
Commitments of Traders
Utilizing the Commodity Futures Trading Commission's (CFTC) Commitments of Traders ((CoT)) reports for crude oil, I was able to dissect how traders were re-positioning in the week ending February 14th.
The four groups I follow - Hedgers (Producer/Merchant/Processor/User) Longs and Shorts, and Speculators (Money Managers) Longs and Shorts - are defined below:
Hedgers: 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.
Speculators: A "money manager," for the purpose of this report, is a registered commodity trading advisor (CTA), a registered commodity pool operator (CPO) or an unregistered fund identified by CFTC. These traders are engaged in managing and conducting organized futures trading on behalf of clients.
The latest data include data for both options and futures combined for the New York Mercantile Exchange (NYMEX). All comments below pertain to each group as a whole, on balance, noting there are exceptions among individuals.
Hedge short positions, mainly U.S. crude oil producers, sold an additional 48 million barrels last week, raising hedges to 756 million barrels. Producers appear to be anxious to ensure they can maintain future oil prices in the $50s in the event that the market does break lower under the weight of high inventories.
The record short interest is 789 million barrels. I have predicted that record will be broken, and it appears that may happen soon.
Their current hedge size represents about 23% of U.S. crude production for one year, and so there is a lot more potential for hedge sales, which act as a wall to higher prices.
Hedge longs increased their length by 36 million barrels to end at 477 million barrels. This buying offset much of the selling by hedge shorts. This group includes both end-users as well as refinery processors. Oil refiners could be both hedge buyers and hedge sellers as they hedge both legs of crack spreads (long crude, short products). Petroleum product exports are up 25% year-over-year.
Long oil speculators set a new record high last week after buying 13 million barrels. They held 433 million barrels. I view this as a crowded trade with a lot of downside risk if there is a loss of confidence in this trade. It seems to me OPEC has a lot to prove.
Spec shorts bought 18 million barrels to end with 43 million barrels. This is the smallest short position since before OPEC's November 2014 meeting. As a result, the potential buying from this group is getting closer to zero.
Netting the long and short positions of both these hedgers and speculators, there was a net purchase of 18 million barrels. As a result, they held a net long position of 111 million barrels.
The positioning of both speculators and hedgers has become more extreme. Hedgers are better protected for a move up or down.
On the one hand, a break to the upside might prompt hedge short covering. On the other hand, a break down could prompt heavy covering by the record long speculative interests.
This stand-off by longs and shorts seemes likely to break depending on how supplies unfold over the weeks ahead. Thus far, U.S. data do not reflect any effect of the OPEC cuts which were supposed to start more than six weeks ago.
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.