Skip to main content

Which way will crude market go?

Speculators maintained a net long position of 11,659 crude futures contracts at NYMEX markets according to this Friday's CFTC release, ended three consecutive weeks net short positions since 7/22 (see the first chart below, green circle). Considering the CFTC data were as market closed on Tuesday (8/18), one day early than $11 plus up and down movements on Thursday and Friday, if there are any indications, it certainly points to more turbulence ahead.

Popular media stories attributed the $5 gain and $6 loss of light sweet crude price on Thursday and Friday to dollar and geopolitical factors (Georgia, Russian conflicts and cold war rhetoric), and thin volumes could also exacerbate magnitude of pricing movement. Dollars and geopolitical tensions have been part of equations that drive crude prices, but the relationships may be in a non-linear fashion and much more complex than headline news indicates. The Georgia and Russian conflicts began two weeks ago, crude price did not show much reactions when the news hit the public domain until this past Thursday, that was a real long delayed reaction! Making the direct connections between strong gain of crude price on Thursday to Georgia/Russian/US was a stretch, say the least, when EU brokered the agreement for Russian troop withdrawal. The relationship between dollar and crude may have become "chicken or egg" issue. It is hardly to decipher which one is the driving force, and most likely driven by the momentum and sentiment than fundamentals. The magnitude of dollar movement certainly was not in the position to explain oil price changes in last few days.

The possible reasons for the dramatic shift of oil price actions in last week were likely related to the technical factors in the crude futures market. At the NYMEX, the last trading day for Sept contract was Wed (8/20), the upward movement we witnessed on Thursday might be partly due to futures rolling into Oct contracts. Another contributor for the huge upward movement might also come from severely oversold conditions and the persistence of oil staying above $110 level, a major technical support level.
Does the net long position after almost a month bearish bets signal the coming back of raging oil bulls? I would argue as long as financial malaise stay in headlines, long oil and overweight energy on equity side are probably a little bit too early considering the extreme commodity bullish sentiment built-up over last two years and unsettled credit markets .
Labels:

Popular posts from this blog

Negative Swap Spread

One of most intriguing event, which barely got any attention in the market, was that, for the first time in the history, 30 year USD swap spread dropped into negative territory today. The US treasury 30 year bond traded at 4.027% and the same maturity US dollar swap traded at 4.051%, i.e, 30 year swap spread was about -2.4 bps (see attached Bloomberg chart below) . The 30 year swap rate only go back to early 1994 in Bloomberg data base, in the last 14 years, swap curve was always and should traded at discount to the treasury benchmark, "risk-free" bogey. So what is mean for the equity and credit market? Or most importantly, is the swap market trying or pricing the much deep recession or an early signal of Japanese-style deflation market has feared in 2003? Is the US treasury credit quality put into challenges? Or just the abnormally due to temporary market forces? Isn't the market facing the greatest CREDIT crisis we ever face since the Great Depression? Should we expect...
Read more

Updated: Will AAPL be $125-150 by July?

In late March, we saw significant bullish bets on AAPL in option markets. In my post " Will AAPL be $125-150 by July ?", we noticed a huge call spread position (10,000 contract) hit the tape on March 25. AAPL was closed at 106 and change, and has rallied more than 35%, which certainly make the owner of this long bull spread position smile proudly. So how much profit we are looking at right now if the investor exits the position today? At this moment, AAPL July 125 call is traded at about $19.50 and July 150 call around $4.20. Ignoring the transaction cost, each contract is worth about $1,530, so the total position is $15,300,000. Remembering that the initial investment was only about $3,950,000, and so net profit would be $11,350,000. The trade almost triples the initial investment just over two months! Not a small feast considering the limited risk profile.
Read more

Speculators Held Highest Net Long S&P Futures

Today's dramatic 1000 point reversal of Dow 30 may be just the capitulation point that market has been looking for in this free fall market. Many other sentiment indicators, such as AAII bull and bear readings, VIX and 52 week high/low also point to the extremes. Underneath this gloomy and Armageddon scenario, one of most significant and interesting piece of data is in the futures market, specifically speculator's reading in this scary market. According to today's data release from CFTC, it looks that speculators have positioned for market (S&P500) turnaround. As this past Tuesday, speculators have built more than 102,000 long S&P500 positions, a highest in last five years. More importantly, the speculators also have reduced the bearish bet, short positions to just about 43,000, a lowest level in two years. Without questions, in the last few weeks, the equity market was the darkest period for the long side, but the end may be in sight at least in the short term. Th...
Read more