Amazing, dramatic, unprecedented, unbelievable are words normally used to describe things like a moon landing or the NY Giants winning the Super Bowl this year not necessarily the performance of a commodity market. But those were just some of the words that can be used to describe the historic price activity in the oil patch on Thursday and Friday of last week. To say the market overreacted to a statement and an economic report would be an understatement. What makes the late week surge to the upside even more dramatic was the fact that the oil complex was showing all of the signs of a major downside correction. A simple statement by the President of the European Central Bank that inflation was a forward concern and interest may have to be raised was enough to reverse the downside correction in oil and cause the oil market to make the single largest move to the upside in history. This historic event was quickly trumped on Friday after the unemployment numbers showed the unemployment rate increasing from 5% to 5.5% (unexpected) indicating the US economy is still very weak and the FED may be unable to raise interest rates any time soon which would be bearish for the dollar and bullish for oil. This resulted in Friday’s trading making new historic highs and new historic one day movements with both crude and products hitting upside limits at one point in trading (something that has also not happened in a long time). Remember all of this on the anticipation of an event that has yet to happen!
The fundaments remains weak, the technicals are now strongly to the upside but overbought at the moment and most importantly the market sentiment is once again very bullish. The second half of last week’s trading activity was indicative of what a large influx of speculative and investment money can do to the oil complex, at least in the short term. The vast majority of the move to the upside was a result of first a short covering rally (part of Thursday) followed by new long side buying (versus reluctant sellers) activity from late Thursday through Friday’s trading. That is speculative/investment fund driven not commercial sector driven.
So what is the role of the non-commercial sector in the oil markets? Since only a portion of the information is in the public domain on a regular basis we will comment on the weekly CFTC commitment of Traders report. For the oil market this Friday report basically reports the spec sector (non-commercials) and the hedgers/companies in the business (commercials) as to their long and short positions as well as total open interest in the regulated futures markets (and some unregulated OTC trades on exchanges). Using just the oil futures (WTI, HO & RBOB gasoline) the following chart shows the net long position (longs minus shorts) of the non-commercials or spec traders on the Nymex (blue line) going back to the beginning of the long term uptrend (2000) through the data released this past Friday. In addition the chart shows the price of a composite (red line) of the three futures markets (weighted by average open interest…70% WTI, 15% HO, 15% RBOB). Both lines also have a linear regression trendline which helps show the overall trend. So what does this indicate?
· With few exceptions the trading/investment community have been mostly long throughout this entire move and since 1st quarter of 2007 the net long position has increased significantly indicating more trading and investment money flowing into the complex biased to the upside.
· The trendline of the net long position clearly remains to the upside.
· The composite price has moved mostly to the upside throughout the period.
· Since early 2007 the upside price move has accelerated significantly as demonstrated by the slope of the price curve since then.
· Interestingly the trendline of the composite price is not only upward but seems to be leading the net long position trendline. What does that indicate?
o That indicates that possibly the specs are not leading the market higher and/or looking only at futures data is not enough to draw the conclusion as to whether or not the specs are leading the market higher.
o During this time frame unreportable/unregulated bilateral OTC activity has grown in leaps and bounds along with the consumers interest in commodity index funds. It is likely that these sectors are also biased to the net long side of the trade, especially the investors flowing into the commodity/oil index funds which according to some reports has grown in the last 5 years 10 fold to over $260 billion dollars of investments. If so it would help explain the accelerated upside slope of the price trendline versus the futures non-commercial upside trendline.
· Bottom line (although not entirely conclusive) the specs and the investment flow are impacting the price of oil (at least in the short and medium term) and will likely continue to do so until the market is convinced the risk of a supply disruption is eliminated and/or the dollar begins to firm (as it was just one week ago). Last week’s price activity was absolutely spec led and not commercial sector led.
So what is in store for the week ahead (beside very hot weather along the East Coast of the US)? We are starting out with a bit of profit taking selling which is completely expected and normal after the large move last week. The fundamentals are likely to remain bearish as demand for energy in the US is definitely on the downswing. In fact the big increase in the unemployment number should really be interpreted as bearish for oil as less people work, less driving by those people along with less money to fill up their SUV’s with post $4/gal gasoline. Higher unemployment is bearish for the economy and bearish for oil demand. This week’s fundamental snapshot is likely to show a small draw in crude oil, builds in both gasoline & distillate as a result of increasing refinery runs and demand reduction. Overall it should remain bearish.
Will the fundamentals matter this week? Most likely not especially if the dollar starts spiraling to the downside. Watch the economic data coming out this week and how it impacts dollar trading for the a good clue as to the direction of the oil price. We think the market momentum will carry it to a test of $140//bbl WTI at some point this week.
Currently prices are on the downside for oil with the dollar mixed.
| Current Expected Trading Range | | | ||
| | 6/9/08 | Change | Upper | Lower |
| | | From | Resistance | Support |
| | 7:26 AM | Yesterday | | |
| Jul WTI | $136.66 | ($1.88) | $140.00 | $99.20 |
| July HO | $3.9330 | ($0.0410) | $4.0000 | $2.7100 |
| July RBOB | $3.4800 | ($0.0680) | $3.5000 | $2.5200 |
| July NG | $12.690 | ($0.003) | $13.000 | $11.000 |
| | | | | |
| Euro/$ | 1.5792 | 0.0033 | 1.6000 | 1.5200 |
| Yen/$ | 0.9477 | (0.0043) | 1.0450 | 0.9000 |
Dominick A. Chirichella
Energy Management Institute
tel 646-202-1433
tel 845.368.3904
fax 801.383.7510
www.advancedenergycommerce.com
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