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Speculators still negative on crude oil

Speculators held net short positions first time last week since March, 2006. According to this Friday's CFTC data, speculators were still leaning on the bearish side in crude futures markets. The speculator's overall positions were net short of 660 contracts (see chart below).

The chart shows that speculator's long (green line) and short (red line) positions as well as light crude futures prices (shaded column) since Jan/06. Speculators build the second highest long positions (263,300 contracts) two months ago (5/13), just 1,000 shy from the all-time high (264,400) reached exactly 1 year ago (7/310/7). However, the long positions never broke out above 264,500 even though crude reached all time high of above $147 in early July. In fact, speculator's sentiment became bearish (or most likely locking-in gains and off to summer vacation) since reached the second highest level and began to close out their long positions and accumulated short position bets about 2-3 months ago. The short positions broke 200,000 contracts first time on the July 4th weekend and had maintained at about the same level in the last two weeks.

In the last two year's crude oil bull run, there are some evidences that the speculator's position provides some leading indication for crude market direction movement. Since we have such difficulties (impossible?) to predict future, the next best alternative would be using history as a guide. The last time speculators held the largest net long positions to the end of net short positions last about 5 months (from Sept 06 to Feb 07), and light crude declined about 30% during the period. It won't surprised if crude retreated about similar magnitude to around $100, from all-time high $147. A 100-110 dollars per barrel for light crude are considered as very important technical levels. Like any other investable assets, the speed of market correction or bear market are usually much faster than when markets are on the uptrend. In the near term, we could see more volatile movements, either up or down. But I would place high probabilities on declining than raising in 3-6 months horizon.
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