Who’s Left to Buy? Oil Longs are Nearing Extremes

Kimberly Rios, CFA, CMT, Portfolio Manager
Kimberly Rios joined Catalyst Capital Advisors as a Portfolio Manager in 2014. She is currently a Portfolio Manager of an options-based commodity fund at Catalyst Funds. She carries the Series 3 license, the Chartered Financial Analyst (CFA) Designation, the Chartered Market Technician (CMT) designation, and is a member of the National Futures Association. Ms. Rios has degrees in Economics and Finance from the University of Arizona.

The Commitment of Traders report, which comes out every Friday reflecting Tuesday’s data, can be used as a sentiment indicator at extremes. While hedger’s/commercial’s positioning can be direct signals, speculator’s/money manager’s positions can be contrarian signals. This means that a large long position for the hedgers could indicate an asset’s about to increase in price whereas the same position for money managers could indicate that prices are about to decline.

Besides the net positioning (longs-shorts), you can look at the ratio of long positions to short positions for clues on extreme positioning. As of this past Friday 4/23/19, the Commitment of Traders report showed money managers with a long to short ratio of 10.58. This is the highest long to short ratio for money managers since the October 2018 top, and above the ratio of both the 2014 and 2017 tops.

While this alone would not cause oil to drop, it could instead limit the upside potential remaining because there are barely any money managers left short and also could magnify any drop as the extended long position would need to be sold out of if prices start to fall.

According to Market Analyst John Kemp, who also produced the above chart,

“From a fundamental perspective, the balance of risks in the oil market is arguably still tilted towards the upside, with production problems multiplying and continued growth in consumption. Still the bullish news has been heavily anticipated, and the trade had become crowded by last week, leaving prices vulnerable to a setback when funds attempt to realize some profits and reduce their risk exposure”

The weekly chart below demonstrates how fast the recovery was from December’s low. Price advanced on healthy volume.

Observing both the advance of over 50% from the low without much pause and combing the new CoT report data, indications are that the bulls have a tough road ahead.

Disclaimer: Daniel Saffrin is a Portfolio Analyst on the Catalyst Hedged Commodity Strategy Fund. The Fund trades oil options on futures and currently has both long and short positions.