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Fresh buying pushes crude oil net long to record high; gas traders short cover

A volatile but slightly higher price trend in crude oil and natural gas in the week ended Jan. 17 saw bullish participation by smart money traders in crude oil, but short-covering was dominant in natural gas.

The latest "Commitments of Traders" report published by the U.S. Commodity Futures Trading Commission on Jan. 20 revealed that managed money traders in crude oil added 65,055 contracts to their net long to reach a record of 343,415 lots. The previous record was 339,278 contracts and was reached in the week ended March 4, 2014.

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The breakdown of trades showed that there were 49,295 new long positions opened while shorts fell 15,760. Prices gained $1.66 during the survey period, but March futures settled 47 cents lower on Monday, Jan. 23.

"Crude oil prices are trying to determine whether they should focus on historic compliance to an OPEC/non-OPEC cut, or signs that shale producers may start to make a comeback," Phil Flynn, senior market analyst at Price Futures Group, said. "Oil prices are shaken from a much larger than expected jump in U.S. oil rigs."

The total U.S. rig count increased 35 in the week ended Jan. 20 to reach 694, according to data from Baker Hughes Inc. It was the highest level reached since the week ended Dec. 31, 2015.

Noncommercial traders also reached a new record by adding 31,116 contracts to their net long position of 464,678. The addition was made through 27,276 new long positions while 3,840 shorts were liquidated.

While a growing net long has traditionally been positive for price trends, the move to a new record could also be cause for worry.

"It should be noted that extremes in bullish or bearish positioning have a tendency to align with turning points in the market," Matt Smith, director of commodity research at ClipperData said. "For example, the last time that net-long positions were this high, oil was peaking for the year in June 2014 around $108/bbl. And the lowest net-long position at the beginning of last year coincided with the multi-year low for crude."

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, the trend in smart money holdings also moved in a bullish direction, but it was done mostly through short covering, which can have mixed effects on prices.

Managed money accounts added 21,799 to their net long position to reach 162,054 contracts in the week ended Jan. 17. Prices gained 13.4 cents during the survey week.

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The change was made through short covering, with 18,279 short positions liquidated while longs added 3,520 contracts.

"While not necessarily an extreme within the established five-year range, we view the market as at least somewhat overbought," Tim Evans, analyst at Citi Futures, said.

Noncommercial traders subtracted 25,766 from their net short to arrive at 7,961 contracts. The change was made through 3,164 new long positions while shorts were reduced by 22,602 contracts.

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.