Crude oil prices were in the midst of an uptrend when Russia invaded Ukraine a little over a year ago and the news propelled oil prices above $120/barrel. But oil prices have given back those gains and have almost halved since the last push above $120 in June 2022. This has prompted the big money “commercial” traders in crude oil futures to trim their short positions in a big way, seen in this week’s chart.
Every Friday, the CFTC publishes its weekly Commitment of Traders (COT) report, which details how many futures contracts exist and how many are owned by different groups of traders. The CFTC divides these traders into 3 groups. First, there are commercial traders who use the commodity in question in their trade or business – think Cargill for wheat, for example. Non-commercial traders are the big speculators, so think hedge funds. And non-reportable traders are the small speculators whose positions are so small that, according to the CFTC, it’s not worth tracking their holdings individually.
The net positions of these 3 different categories can be more or less significant in the different futures markets, so it can be worth looking at the net position of each category. Usually the commercial traders are the “smart money” as traders involved in this business usually know a lot about it and what a reasonable price is. In crude oil futures, many commercial traders are oil producers using the futures market for their intended purpose, allowing them to set prices today for oil that they will produce and ship months from now. When an oil producer enters into a futures contract to sell its future production now, that is a short position and another trader takes the long side. This other trader can be a refiner or a speculator, for example.
Because oil producers use the futures markets for this purpose, commercial traders in crude oil futures are almost always net short to varying degrees. The last time they were net long as a group was in 2009. Therefore, the game for analysts is to assess the message of commercial traders’ current position relative to previous levels.
Two weeks ago, commercial traders as a group were at their lowest net short position since 2016. They said at the time that current prices are so low that these traders don’t want to lock in those prices. They would rather let prices float and hope to do better over the next few months.
OPEC+ also appears to believe current prices are too low, so on April 2 this organization announced a production cut, causing an immediate $5 surge in oil prices. The commercial traders were right about the prices being too low. Since this OPEC+ action, the commercial traders have increased their net short position only slightly, in line with the price action. But they are still net short as a group, suggesting there is much more room for oil prices to rise before this indicator would say prices have risen too far.
Every Friday I review the new developments in the COT report data for selected futures contracts and provide updates on some of them in my daily issue.
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