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OPEC, sub-zero temperatures prompt 'smart money' to extend long positions

Upside follow-through buying by smart money traders in crude oil in the wake of the OPEC meeting was a feature of trade last week, while natural gas traders remained bullish on the approach of cold weather, according to fresh data from the CFTC.

The latest "Commitments of Traders" report published by the CFTC on Dec. 16 revealed that noncommercial crude oil traders extended their net long position in the week ended Dec. 13 by 45,141 contracts to reach 422,767. It was the largest net long position held by the trader group since the week ended July 8, 2014.

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The breakdown of trades showed that longs added 24,993 contracts while short positions declined by 20,148. Prices rose $2.05/bbl during the survey week, and a lot of the strength may have been upside follow-through in the wake of the OPEC decision to reduce production targets at their meeting on Nov. 30.

"What we are seeing is that the oil market may tighten a lot quicker than people think," Phil Flynn, senior market analyst at Price Futures Group, said. "Bears were counting on Libya to replace OPEC oil cuts and now that looks like it will not happen soon."

Flynn also said cold weather is slowing some production in the U.S. due to wells freezing.

Managed money traders added 32,232 to their net long to reach 274,757 contracts, which was the largest net long held by the trader group since the week ended July 8, 2014. There were 14,775 new longs added while shorts fell by 17,457.

Noncommercial traders include those that are large enough to meet minimum position thresholds but are not involved in hedging, while the managed money category includes those who engage in futures trades on behalf of investment funds or clients. Both are widely followed by traders and are considered to be the "smart money," as their positioning can track or sometimes lead changes in price trends.

In natural gas, traders classified as noncommercial decreased their net short position by 53,085 contracts to reach 14,460 in the week ended Dec. 13. It was the smallest net short that the trader group has held since the week ended May 15, 2007.

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The reduction was made through the addition of 37,094 new longs while shorts were cut by 15,991 contracts. Prices declined 16.1 cents during the survey week, but there is a chance that the smart money could be correct in their bias based on the size of recent reductions in inventories.

"Inventories fell below the year ago level for the first time since Dec. 5, 2014, and with cooler temperatures last week and expected next week, inventories are likely to slip below the 5-year average by Dec. 23," IAF Advisors analyst Kyle Cooper said. "Thus, unless weather forecasts turn even more bearish, prices are likely to find support and possibly head higher in coming weeks."

Traders classified as managed money boosted their net long position by 56,400 in the week ended Dec. 13. It was the highest net long position since the week ended Feb. 25, 2014. Long positions gained 34,557 while shorts dropped 21,843.

Market prices and included industry data are current as of the time of publication and are subject to change. For more detailed market data, including power and natural gas index prices, as well as forwards and futures, visit our Commodities Pages.