COT Black: Diverging Like ’13?

By Jeffrey Snider

During the week of February 21, 2017, Money Managers (MGR) in the WTI futures market went all the way for higher oil prices. The CFTC Commitment of Traders (COT) report showed a then-record 405k net to the long side. For whatever reason(s), oil prices didn’t necessarily follow at least not in the same nearly direct manner as they had in the past. The intensity of MGR’s net long position alone had up until the “rising dollar” determined the domestic benchmark oil price.

A week after, the final one in February last year, MGR’s started to back off. Oil prices did, too, though to a lesser degree like on the way up. After just four weeks, the long position had been pared back by almost half. WTI that had climbed to a rebound high of $54.48 on February 23, 2017, declined back to $47 in late March.

The process has repeated in 2018 with a few notable exceptions. MGR positions hit a new record long the week of January 30 – the same week that global liquidations swept across stock markets. Since, managers have cooled in their enthusiasm, though not quite in the same repositioning as 2017. The net long as of the latest estimates (for the week of May 15) has only fallen back below 400k.

Yet, despite the waning MGR position oil prices have continued to tick higher. The current absence of further longs hasn’t pressured WTI to any noticeable degree.

Stranger still, Swap Dealers (DLR) who have been “opposing” MGR’s for most of the past two years haven’t rescinded their net short position by nearly as much as managers have backed off their longs. You would think that would be WTI price negative, but again oil prices continue to rise ever so gently.

Outside of those two classes of participants, Producers continue to wind down their presence. Lower inventories reduce need for hedging, and maybe that explains the new balance. The decline here, however, is far more than the reduction of crude stocks.

It does seem as if Producers are expressing more confidence in oil prices given the growing divergence between the pace of drawing down inventories and their retreat from their hedging short in futures markets. It would be a bullish signal.

Fundamentally, oil inventories are still well on the high side. They continue to be better than the last few years, but don’t appear to be in any hurry to normalize to prior levels. That might propose dealers are more than a little ahead of themselves, extrapolating still at a steeper slope than has yet to appear.

This negative imbalance has continued to spill over into gasoline stocks, as well. On this side of the regular seasonal accumulation, heading closer toward the summer driving season, gas inventories are as high as the past few years.

It may be that producers are viewing the futures curve and its continued move into deeper backwardation as confirmation of their prospectively more positive view. That’s a bit circular, however, particularly if producers have been largely responsible for the action in the futures market.

Is it enough that either DLRs or MGRs aren’t protesting the curve shape enough to avoid a self-fulfilling shift?

This internal divergence isn’t the only one we find from oil prices, either. As noted before, WTI and other global benchmarks have parted company with quite a few “dollar” indications and prices, such as Brazil’s real.

It may be that BRL is early to where WTI will eventually be if the “dollar” keeps rising. We’ve been here before.

In the second half of 2013, for example, oil fundamentals were seemingly positive, DLR’s would go to a then-record net long, and the idea of global growth during Reflation #2 was not so far-fetched. In fact, there was much more confidence in QE’s 3 and 4 bringing about recovery than whatever more non-specific ideas might be behind Reflation #3.

BRL fell sharply during that summer, the so-called taper tantrum, while WTI rose. From May to August 2013, the real dropped from 2.00 to 2.44. It was an alarming decline, though the world did its best to ignore it.

At the same time, oil jumped from around $90 to a high above $110. It wouldn’t be until the following year that “dollars” and oil would finally sync up as global economic growth fell off precipitously. The deflationary impulse of that eurodollar decay episode was as fierce worldwide as anything since 2008-09.

In other words, it may be that like 2013 the idea of “global growth” still carries some weight (particularly with oil producers?) and the oil market/price can further resist until the narrative is later revealed as no longer viable. If the global economy is, in fact, starting to rollover, that would place a good deal of emphasis on when “later” might be.

There aren’t a whole lot of clues in the COT figures, especially with MGRs and DLRs both still closer to extreme opposites (a big difference from that earlier episode). At least not yet.

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Gary

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