WTI futNov10.pngThe obvious is rarely a winning strategy in commodity markets. Too many players have inside knowledge to allow anyone to profit from their own position.

But now and again, interesting trends do emerge from following how the major players are positioning themselves. Thus the above chart from Petromatrix provides a valuable insight into the different views being taken on oil markets by the Swap Dealers and the Large Speculators.

As it shows, the net length taken by Swap Dealers (green line) is now at a record low. These are the commercial dealers (eg Goldman Sachs), who have recently been producing daily reports forecasting $100/bbl crude. But they also act for the commercial players – the major oil companies. And so it seems most likely that it is these who have been hedging forward their positions.

Thus almost uniquely, the Large Speculators (red line) now hold all the net length on the US futures markets. These are hedge funds, who have been busy buying crude oil on the famous ‘correlation trade’, arguing that a lower value for the US$ means higher commodity prices as a store of value.

Initially, their buying caused the recent 7% rise out of the ‘triangle shape’. But prices then drifted lower, as producers decided to lock in $80/bbl. And as Petromatrix note, this could cause problems for the Speculators, as producers may not simply close winning positions for a small gain.

The Speculators will clearly continue to try to push prices towards their beloved $90 – $100/bbl range. But if they fail, and prices start to move towards $70/bbl, then there is a clear risk the hedge funds will panic, and in so doing take prices down towards $60/bbl.


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