Behind the Market Headline News

Since hitting the multi-year low $33.87 measured by front month future contracts trading on ICE on 12/19/08, Western Texas Intermediate ( WTI ) light sweet has been stuck at a trading range between $34 and $48 so far this year. Today front month contract was closed at $33.98, almost exactly the same lowest level occurred two months ago. The most interesting question, intriguing many commodity and equity investors alike, is this the temporary bottom or just the beginning of another leg downward spiral to further unwinding excess bullish positions that had built up prior to the July peak last year . If we examine the current future term structure, we may come out with the conclusions that likely outcome in next few weeks WTI would go higher than lower. Since the term structure shifted from backwardation in late July last year to current contango , the spread between front month and 2 nd month contracts has increased steadily. Today the spread reached highest level, about $8 (see...

In my previous post on Q2 SEC quarterly filings from a limited numbers (182) of available hedge funds, we noticed that hedge funds had significantly over-weighted energy and material sectors, two of best performing groups among the 10 S&P sectors. It might be purely coincidental but we can not help to ponder the implications for these two tumbling sectors. As today (8/27), almost 1000 hedge funds filed their last quarter's 13F based according to Bloomberg . The screen below from Bloomberg shows that hedge funds as a group places their biggest bets on energy as we discussed previously. Considering the short term natural of their holdings, it should not surprising many that the unwinding process of energy names will continue in the current quarter. We probably won't see much improvement until the end of next month when the "window dressing" is finally over.

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 ...

There were 182 hedge fund managers filed form 13F with SEC as Thursday (8/7/08) for Q2 according to Bloomberg. On aggregate level, one of striking similarities among hedge funds were heavy overweight on energy sector comparing to S&P. There were no surprises that hedge funds also significantly underweighted financial and consumer sectors in the second quarter, and maintained neutral stands among other major sectors. Was the 4% overweight on energy sector a major driver of 20% sector gain (based on XLE) during the 3 month period? If it was not the ANSWER, there was no questions that gorging of energy names by the deep pocket hedge funds were one of forces contributing to one of dramatic energy bull run until the end of second quarter. We are looking at the rear mirror of hedge fund manager actions, but today's energy related commodities wreck probably won't end soon considering many hedge funds might continue their unwinding energy positions and asset class re-allocations.

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 a...

In my 7/8 post ( Just the beginning? ), speculator's futures and options contract positions were examined, it indicated that crude would begin long over due correction. I used speculator's futures contract positions this week to assess the indication of crude oil movement. US crude futures market had a very significant sentiment change based on this Friday's data from CFTC's release for market close 7/22. For the first time in the last 17+ months, "non-commercial" participants, or speculators held net short crude futures positions at NYMEX (see chart "Crude weekly price and speculator net crude futures positions"). The net short positions of 3,640 contracts were mainly caused by closing nearly 12,000 long positions and increasing over 14,000 short positions for the week. The total outstanding short positions for speculators stood at over 201,600, the second highest level (the highest level was 203,000, happened two weeks ago on 7/8) since the beginni...

As mentioned in my previous post "Natural Gas Momentum Marches on!" in this blog that even though the "speculators" have remained net long futures and option positions in NYMEX (see chart below) based on the data from CFTC as last Tuesday (July 1st), the outstanding contracts for long positions, however, have been closed out continuously in the last 5 weeks. The total contracts of long position declined from over 260,000 to just above 210,000. At the same time period, the short positions remained at relatively consistent level of about 190,000. The nearly $10 slide of Western Texas sweet crude in last two trading sessions (7/7 and 7/8) hardly can be explained by the popular media/talking head's hypotheses, namely dollar related trade, China/India growing demand/limited oil production capacities, mid-East geopolitical tensions etc. True, the greenback has been strengthening since ECB indicated the 25 bp increase on 7/2 might be enough to fend off inflation pr...