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Chart In Focus

Small Speculators in Crude Oil Are Still Eager

Chart In Focus
May 24, 2024

Every Friday in my Daily Edition, I cover some of the interesting insights in the weekly Commitment of Traders (COT) Report, published on Fridays by the Commodity Futures Trading Commission (CFTC).  That report lists the totals of trader positions in different categories for 314 different futures contracts (at last count).  This week's chart looks at the net position of the "non-reportable" traders of crude oil futures.

The non-reportable category has that name because the traders in that category have positions which are so small that the CFTC figures they are not worth tracking individually.  The CFTC really wants to know how many contracts Exxon and Chevron own, as well as the big hedge funds.  But the small traders with a handful of contracts are not worth tracking.

Generally speaking, the non-reportable category of futures traders in all contracts are the hot money, and they are usually wrong when they get to an extreme.  In crude oil, this group also tends to be affected a lot by whatever prices are doing.  They pile in during rallies, and get scared away during selloffs.

One important note about the non-reportable traders of crude oil futures is that they are nearly always net long to varying degrees.  Every futures contract is simultaneously 1 long position and 1 short position, held by different parties.  The trader who is short is committed to make delivery at the contract expiration date, and the trader who is long is committed to take delivery.  Or they can trade out of those positions before expiration (they hope).  Each group in the COT Report (commercial traders, non-commercial, and non-reportable) holds some number of long positions, and some number of shorts.  The difference between those is their net position.

The last time that the non-reportable traders of crude oil futures were actually net short as a group was all the way back in November 2019, which is off the left end of this chart.  This bias toward the long side means that when we go to interpret their current net position, we have to account for how they are normally positioned.  One should never make judgements based just on the raw number of contracts, but rather look at a chart to get context.

What is really interesting right now is that crude oil prices have been falling, but the non-reportable traders have been moving toward a bigger net long position.  That is irregular, but not unprecedented.   What this means is that their change in sentiment is not coming about due to the normal pressures of price movements, but rather out of pure speculation.  And that is the most important type of sentiment.

When we have seen a spike up in their net position like this during price drops, it usually means that there is more to come for falling prices.  Some examples are highlighted in the chart above.  The message is that the amount of price decline we have seen thus far has not been long enough or hard enough to get the small speculators to abandon all hope.  So it has more work to do.

At the point when these small speculators decide that they cannot stand it any more, and start aggressively bailing out of their collective net long positions, then we can say that a price bottom is probably at hand.  But oil is not there yet.

Tom McClellan
Editor, The McClellan Market Report

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