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Addition of new shorts reinforces bearish oil bias, corrective tone in gas

Thereluctant liquidation of smart money long positions appeared to gain momentumlast week as prices of crude oil continued to fall. The appearance in naturalgas was similar, with managed money traders opening new short positions.

Datafrom the "Commitments of Traders" report published by the U.S. CFTCon July 22 showed that traders classified as managed money in crude oilliquidated 18,443 contracts from their net long position to reach 136,086contracts in the week ended July 19. It was the smallest net long positionsince the week ended March 1.

Thebreakdown of trades showed that the reduction was made through the addition of24,100 new shorts, while there were 5,657 new longs opened. Prices fell$2.15/bbl during the survey week, which suggests that managed money tradersbelieve the weakness in prices could last several more weeks.

"Thecombination of bearish oil fundamentals and concerns about the global economywere the main negative price drivers last week," Energy ManagementInstitute principal Dominick Chirichella said. "Both WTI and Brent willhave to move above the $50/bbl level and remain there for the shorter-termtraders to regain confidence that the market is embarking on a new up leg. Atthe moment this is looking less likely to happen in the short-term."

Noncommercialtraders reduced their net long by 5,214 contracts in the week ended July 19,with 14,625 new shorts opened and 9,411 new longs initiated.

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, sentiment was somewhat similar to that of crude oil, as managedmoney accounts became more negative. The trader group added 12,043 to its netshort position to reach 42,294 contracts. The trades were done through theaddition of 10,429 new short contracts while longs shrunk by 1,614.

Theaddition to the overall bearish bias held by the smart money took place astraders started to look past the summer heat and toward the prospects forinventory additions during the upcoming shoulder months.

"Despitethe extremely warm temperatures and dramatic reductions in the yearly and5-year average storage surpluses … the market traded lower as the peak summercooling season is approaching," IAF Advisors analyst Kyle Cooper said. "Itshould be noted that a continuation of above normal temperatures pastmid-to-late September will become bearish."

Themarket also anticipates inventory levels being near at the end of theinjection season.

"Unfortunatelyfor the long term Nat Gas bulls, in spite of record high levels of Nat Gascooling related demand, there remains an ample volume of Gas in inventory,"Chirichella said. "Even with the above normal level of Nat Gas coolingrelated demand and the subsequent underperformance in the weekly injectionsthroughout the majority of the injection season to date, all signs suggest thattotal inventories at the start of the upcoming winter heating season will be ator near record high levels."

Noncommercialtraders had a slightly different view, although the change in positioning wassmall and short-covering was indicated.

Noncommercialaccounts subtracted 2,333 contracts from their net short position to reach136,535 contracts. Longs added 110 while shorts covered 2,223 positions. Pricesfell 0.6 cent during the survey week.

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