Tuesday, November 8, 2016
Oil Not Right Yet - Still Leaning Bearish
Since October 19th, we have maintained a bearish view on WTI. Crude Oil traded from a high of 52.22 (December 2016 future) to a low of 43.57 on Friday (November 4th). Though there had been 11 new session lows in as few as 12 sessions, we remain somewhat confident that, while stretched, a low price has not yet been achieved on this move.
A new daily high was reached both yesterday and today (Tuesday, November 8th). This advance has led to the break of a very sharply sloped downward channel which had captured trade over the 6 consecutive session new lows ending Friday. Clearly this should be viewed as a sign of a shift in momentum. However, we do not see this as a terminal change in momentum and as such it is not enough to move us from a bearish view.
Today I will review changes in futures open interest for market participants in general as well as changes in ‘large spec’ and ‘small trader’ (CFTC described ‘non-reporting’) positioning in the CFTC - Commitment of Trader Report. We believe this information argues for still lower price action to follow.
First, as noted previously, Crude Oil aggregate open interest has continued to rise. Since the December contract peaked on Oct 19th, open interest increased by 145,000 as the contract fell in price by 17% (8.65) to Friday’s low. Increasing open interest shows that collectively, longs who have been taking a beating, have not removed their positions. Sure, there has been some change in ownership, but even substitute longs have not fared any better fate over the last 3 weeks. Here is a look at the open interest change in WTI futures positions:
Note that even on Friday in an 11th new low, open interest increased by 19,000 and on Monday, open interest rose by another 26,000. We are interested in learning who is taking up these positions. Earlier (Bear Oil Trend Still Strong) we looked at the participation by CFTC described ‘non-commercial’ accounts, often referred to as ‘large spec’. These account types had been piling into long positions since the September 20th reporting date. Their net long positions (futures and options) rose by 180,000 contracts through the October 11th reporting date 3 weeks later. On Friday, it was reported their net long position had dropped by 44,000 or roughly 10% in the week ending November 1st. The drop in ‘large spec’ net longs (futures and options) tells us that hedge funds have been coming out of their long position.