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Speculators Dump Long Crude Positions During Worst Tumble in 18 Months

Speculators Dump Long Crude Positions During Worst Tumble in 18 Months

2010-05-21 22:39:00
John Kicklighter, Chief Currency Strategist
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North American Commodity Update

Commodities - Energy

Speculators Dump Long Crude Positions During Worst Tumble in 18 Months

Crude Oil (LS NYMEX) -  $69.81   //  -$0.99   //  -1.37%

Crude put in for its third consecutive, weekly decline; but the performance of this past week is very different than that of the first two contractions in the series. From peak to Thursday’s trough, the active NYMEX West Texas Intermediate oil futures contract had lost an astounding 26 percent of its value after topping out at an 18-month high. This retracement was certainly overdue as speculative interest had pushed the market well beyond what the inherent fundamental value would have implied. However, after such a rapid decline, it is more difficult to make an argument that the commodity is either overbought or oversold. Looking at more recent developments, speculative unwinding seems to have leveled off in the final 48 hours of trading this past week. Equities (a relatively straightforward barometer for speculative interest) recovered lost ground through Friday and the US dollar (a safe haven an primary pricing instrument of oil) has retreated for three consecutive days this week. Perhaps the best argument for at least a modest correction is Thursday’s dramatic reversal. The session would inevitably end 5.5 percent above its intraday low of $64.25. There hasn’t been such a dramatic reversal in this market in over a year. On the other hand, this may be more a product of volatility than actual sentiment. The difference is that the level of activity alone cannot leverage and sustain a clear trend. Attempting to assess the market’s bearing, the CFTC’s Commitment of Traders’ report for the week ending May 18th may offer us a clue. According to the data, the net long position in NYMEX crude amongst speculators dropped an astounding 27 percent to 67.361 contracts. This capitulation is reasonable given the distance covered by the contract and technical levels that were overrun; but it also lightens the burden of extremes – meaning there is less selling pressure in the pipeline.

From speculative to fundamental considerations, the financial and economic health of the globe has stabilized - or at least investors’ perception of it has. With the fire sale in risky speculative positions waning, the fear and focus on the world’s most imminent threats has eased. The threat of a Greek default and its potential spread across the European Union has been pushed to the background after borrowing costs have stabilized in the wake of the massive rescue program and the ECB’s efforts to purchase regional governments’ debt. The general concern over sovereign debt risk holds considerable potential but there is still time before this threat hits critical mass. There is also the worry that financial difficulties will slow economic growth and therefore the demand for fuel to power it. In reality, fuel consumption would already be limited as global growth was expected to level off  this year and next; but the unique concerns littering the financial headlines now help to impress this reality on a market that was treating oil as if it was a purely speculative instrument. Already we have seen the influences of a tempered future for growth. In the US, the Department of Energy reported this past week that total petroleum inventories for the nation hit a two-decade, 1.8 billion barrel high through last week’s measurement period. And, this is not just a US concern as can be pointed out by the sharp reduction in the spread between US-based WTI and UK-based Brent crude prices.

 2010.05.21.US.img.1

 

Commodities - Metals

Gold Settles Back from Record Highs as Sovereign Debt Fears, Market Panic Ease

Spot Gold -  $1,177.90  //  -$4.45  //  -0.38%

The capital markets have suffered an incredible bout of volatility over the past week; and there has been a very clear impact on the market’s safe haven assets. For gold, a third consecutive decline would match a similar performance from the dollar; but interestingly enough, the more sensitive and high-risk assets (like equities and carry currencies) would only produce an advance through the final 24 to 36 hours of trading. The metal’s divergence from the standard risk aversion / appetite tides can be attributed to its specific role as a safe haven for those investors looking to avoid sovereign credit troubles later down the line. In the past week, the European Union’s imminent crisis has dissipated. On Friday, the Lower House of the German parliament approved its portion of the massive 750 billion euro rescue program while Spain passed a proposed 5 percent cut on public wages. Japan bought itself more time when the Bank of Japan flooded the market with a trillion yen in same-day lending to ensure liquidity during the morning’s stock plunge. What’s more, the group announced one-year loans to banks that plan to further use the capital on projects that would support growth. Another explanation for the precious metal’s retreat from record highs is the cumulative losses investors have suffered in other asset classes. Drawdowns in accounts inevitably require more margin which is raised from safe haven sources. Gauging speculative holdings, the SPDR Gold Trust reportedly increased its holdings to a record 1,220.15 tons yesterday while COT data shows net longs by large investors fell 2 percent to 231,670 contracts on the COMEX.

Spot Silver  -  $17.61   //  -$0.05  //  -0.28%

Where do silver’s fundamental alliances lie? Through the week, a clear effort to unwind risky positions would carry the metal lower – even when the US dollar began to retrace. Come Friday, the markets would offer a modest bounce in capital markets that could trace its roots more to a shift in volatility than sentiment. And, with fellow growth-tethered assets rising while gold extended its own descent, there was a firm anchor on silver. For positioning, the COT data revealed net speculative long interest rose 14 percent to a four-month high, 42,790 contracts.

2010.05.21.US.img.2

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Written by John Kicklighter, Strategist
Questions or Comments about this article? Send them to jkicklighter@dailyfx.com

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