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New smart money short positions in crude oil could bolster correction

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Six trends shaping the industries and sectors we cover in 2021

Six trends shaping the industries and sectors we cover in 2021

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Essential Energy Insights - January 2021


New smart money short positions in crude oil could bolster correction

Augustcrude oil futures have fallen more than $6.00/bbl from their high in earlyJune, and fresh data on so-called "smart money" positioning showsthat more weakness is potentially in store.

Datafrom the "Commitments of Traders" report published by the U.S.Commodity Futures Trading Commission on July 8 showed that managed moneytraders liquidated 7,246 contracts from their net long position to reach145,365 contracts in the week ended July 5. It was the smallest net long positionsince the week ended March 1.

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Theliquidation took place through the addition of new short positions, whichincreased 9,485 contracts while long positions gained only 2,239. Oil pricesfell $1.25/bbl during the survey week.

"Nota very exciting market right now as both crude and propane seem content to justtrade in a small range," J.D. Buss, trading manager at Twin FeathersConsulting Inc., said. "Burgeoning inventory levels for both crude andproducts coupled with a possibility of an equity slowdown, seem to paint thepicture that the upside in crude could remain highly limited and that pricescould be resting in a range of $35 - $55/bbl."

Noncommercialaccounts cut their net long by 4,567 to reach 299,672 contracts. It was thesmallest net long since the week ended May 10. The reduction was made throughthe addition of 13,613 new short positions while longs added 9,046 contracts.

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

Innatural gas, the data were mixed and showed both short-covering and longliquidation. The activity could suggest that the rally that took place in Junemay continue to falter.

Managedmoney accounts added 2,241 contracts to their net short position to reach30,378. Longs fell more than shorts and lost 6,687 contracts compared to adecline of 4,446 positions for holders of shorts. Prices dropped 15.3 centsduring the survey week.

"Weatherforecasts suggest the week ending July 15 may be the 3rd hottest since late1993. At the same time, a fire and explosion at a processing plant reduced Gulfof Mexico supplies," analyst Kyle Cooper with IAF Advisors, said in anote. "[A]ny moderation in temps or evidence that natural gas has lostmarket share to coal as a result of the new pricing differentials may limitfurther upside."

Noncommercialtraders reduced their net short position mostly through short-covering in theweek ended July 5. The net short position was cut by 2,515 to reach 135,292contracts. Longs were reduced by 6,693 while shorts fell 9,208 contracts.

Market prices and includedindustry data are current as of the time of publication and are subject tochange. For more detailed market data, including SNL powerand naturalgas index prices, as well as forwardsand futures,visit SNL Energy's Commodities Pages.