Crude futures prices fell by $0.32/b (0.6%) lower in the week ending February 28th (to correspond to the data below) to $54.01. Over the balance of the week, crude futures dropped about $0.75/b on balance.
Reports of high compliance with OPEC's cuts dominated the news coverage, providing support. Energy Department reports that U.S. crude oil inventories were at record levels, gasoline stocks are high, and domestic production rising weighed on prices. 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 28th.
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.
Long oil speculators liquidated 18 million barrels of length last week from record high levels. They held 435 million barrels. This was a small fissure in the support of higher oil prices. The catalyst that could turn liquidations into a stampede is continued high inventories due to the ineffectiveness of OPEC's cuts.
Spec shorts became bolder selling 9 million barrels last week. Short positions rose to 49 million barrels. This position is still very low and so the potential buying support from this group is large.
Hedge longs sold 1 million barrels. Positions around 411 million barrels.
Hedge short position holders, mainly U.S. crude oil producers, covered (bought) 1 one million barrels. Total hedges stood at 702 million barrels. This position is still very high by historical standards, but represents about 21% 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.
Netting the long and short positions of both these hedgers and speculators, there was a net sale of 27 million barrels. As a result, they held a net long position of 96 million barrels.
Long speculative liquidations and increased selling by spec shorts is the dynamic that can push prices lower, and it was evident last week. If some impact of the OPEC agreement on inventories is not produced soon, I think that dynamic will continue and could gain momentum.
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.