Speculators abandon oil for the moment

August 23, 2010

Bullishness about the short-term prospects for crude is evaporating among banks and hedge funds, as the market fails to sustain rallies above $80 and girds for widespread refinery shutdowns to work off bulging gasoline stocks.

The urge to buy on the dips, trade the range and hope for a breakout seems to be fading. Banks and other swap dealers boosted their net long position in WTI-linked futures and options by a meagre 7,000 contracts to just 22,000 in the week to Aug. 17, even as prices tumbled from over $80 to around $75.

The last time the market pulled back this far, swap dealers were carrying a net long position of 65-75,000 contracts, according to data published by the Commodity Futures Trading Commission (CFTC).

Money managers actually cut their net long position 16 percent from 151,000 contracts to just 127,000. While the position is still double the early July lows, it is less than half the 244,000 contracts reported at the start of April.

Significantly, hedge funds increased their short positions, even as prices fell, the first big increase in almost two months, indicating increased bearishness.

TABLE:  http://graphics.thomsonreuters.com/ce/COT-TABLE.pdf
CHART 1:  http://graphics.thomsonreuters.com/ce/COTNET1.pdf
CHART 2:  http://graphics.thomsonreuters.com/ce/COTNET2.pdf
CHART 3:  http://graphics.thomsonreuters.com/ce/COTNET3.pdf

In a sign many market participants are now convinced range-trading will continue, with less likelihood of an upside breakout, and perhaps with a bearish bias, the total number of contracts remaining open fell 2.6 percent to 4.124 million, the lowest since July 20 and before that Feb. 23 (Chart 4).

The amount of “excess speculation” — speculators’ positions in excess of those required to offset commercial hedges — measured by Holbrook Working’s speculative T index, has fallen to just under 50 percent, its lowest level since October 2007, and down from almost 100 percent in August 2008 (Chart 5).

The market may need a period of subdued pricing below $75 per barrel, and low refining margins, to compel run cuts and force out some of the stale speculative length.

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