Nymex WTI Speculation Hits An All-Time Record

February 14, 2014

The most recent update by the CFTC, released Friday, February 14, 2014 showed net speculative length by non-commercials was at a new record of +423,000 contracts. The accumulation of long positions has been supportive of oil prices, but in excess it is destabilizing. Speculators can only cash out by liquidating, which will put downward pressure on prices.


Below is a chart of net speculative length (left axis, blue) in Nymex lots with an overlay of the monthly average settlements of WTI (right axis, red). Observe the strong correlation between speculative length and WTI prices, as evidenced by the synchronized rotations higher and lower.



The absolute amount of speculation is unprecedented. 423K contracts is 423MM barrels of oil, an amount greater than all of the US commercial oil storage. This report indicates that speculative length has eclipsed the summer of 2013 highs, which generated monthly average swaps north of $100/bbl. We cannot forecast when or where speculative interest peaks, but we do know that the pool of buyers is finite. Whenever the speculative length (blue) reaches extreme highs, it sets up a better than average hedge opportunity for producers. The reason: Momentum funds are probably fully saturated and are unlikely to have added capacity to support or add to their positions.


Note also that while the level of speculation has risen in the past few months, prices have gone sideways. Put another way, the speculative pool of capital is growing, but oil prices above $100/barrel creates significant demand destruction and increases supply. In summary, R^2 believes this is a good time for producers to be hedging. Speculators are likely running out of capital or risk tolerance. In the absence of other external factors, this suggests that the price of oil is relatively high.

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