Watching the crude oil market over the past few months has been a study in winding a rubber band, or a game of chicken. Each week it has been largely the same thing repeated: oil prices gently rise, backwardation in the futures curve keeps deepening, Money Managers in the futures market bet on higher oil, Dealers bet even more against them.
The massive short position built up by dealers has been further offset to a small degree by the oil producers themselves. With inventory declining, that leads to less of a need to hedge and therefore lower overall net participation in WTI futures. It appears as if it has tipped the balance, despite that unbelievable dealer short, toward higher WTI (for now).
That and the futures curve driving into more normal backwardation in shape, if nothing like normal (for the 21st century) in overall price structure. In that sense, the futures market is a bit of a contradiction; producers are participating less in it because they now hold less in inventory, but inventories aren’t falling all that quickly which keeps the whole futures curve anchored around the $50s rather than shifting much higher on the whole. Oil stocks while still moving in the right direction remain closer to levels prevailing the past few years rather than those from before the 2014-15 crash.
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One other negative factor almost certainly holding the WTI curve largely in place is that gasoline stocks have risen toward the upper end of the historical range as seasonal accumulation starts for 2018.
The charts really require little commentary on my part, which is why there isn’t nearly as much as normal. This is all pretty amazing stuff, particularly that huge short position that gets larger and larger by the week. Something has to give one way or the other, and neither side(s) is backing down. These are big bets and for the dealers, as should be plain on the COT graphs, this is all new ground.
What a way to start 2018. From purely an entertainment standpoint, it doesn’t get any better. For anyone betting on oil, well, good luck with that. There is no contrarian view that isn’t contradicted by another one, no single crowded trade to tell you where to wager against. Whichever side you’re on, you have a lot of company. All the trades are crowded here.
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