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'Smart money' traders appear caught off guard by extent of oil rally

The smart money in crude oil reduced its net long position in the weeks leading up to the OPEC meeting and appear to have been caught off guard by the extent of the rally that ensued.

The latest "Commitments of Traders" report published by the Commodity Futures Trading Commission on Dec. 9 revealed that crude oil traders classified as managed money increased their net long position by 83,845 contracts in the week ended Dec. 6 to reach 242,525. It was the largest net long position that the trader group has held since late October. The increase followed a gain of 3,859 contracts in the preceding week.

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"The latest CFTC and ICE data is, not surprisingly, showing speculators such as hedge funds piling into long positions last week, in the aftermath of the OPEC meeting," Matt Smith, director of commodity research at ClipperData, said in a note.

OPEC during a meeting Nov. 30 agreed to cut oil production to a target of 32.5 MMbbl/d and could effect a positive impact on prices if a rebalancing of supply and demand takes place soon.

The change in the managed money net long figure occurred through the addition of 30,343 new long positions while shorts were reduced by 53,502 contracts. WTI crude oil prices advanced $5.70/bbl during the survey week.

Noncommercial accounts raised their net long position by 89,745 to reach 377,626 contracts. The change was made in a similar way to the managed money category, with longs increasing by 38,090 contracts and shorts falling by 51,655.

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, managed money accounts boosted their net long position by 47,552 in the week ended Dec. 6 to reach 101,107 contracts. It marked the third consecutive weekly increase as the market has begun pricing more cold weather.

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The composition of trades showed that some longs were added while short covering was significant. Long positions increased 9,708 contracts while shorts were reduced by 37,844. Prices gained 32.0 cents during the survey week.

"CFTC data indicated a sizable increase in the managed money net long position as longs added and shorts liquidated," analyst Kyle Cooper with IAF Advisors said in a note. "Cognizant of the recent price advance and sensitivity to a change in weather forecasts, the market will continue to move higher considering supportive weather forecasts and a still bullish underlying supply/demand balance."

Noncommercial accounts cut their net short position by 10,131 to reach 67,545 contracts. The change was made through the addition of 3,826 new long positions while shorts were cut by 6,305.

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.