There Are Several Story Lines In This Very, Very Long Note From A Reader -- March 16, 2022

In reply to another reader's comments, a reader tried posting this comment yesterday, but for some reason it did not post. Maybe there's a limit on length of comments by the "blogger app." I don't know.

But here's the comment. So many story lines I can't even begin to comment. But I will do that later. By the way, that spike to $139-Brent (or was it WTI) has all the earmarks of a short squeeze. Things are starting to make sense. Anyway, whatever, here's one reader's take:

i tried and failed to post a long comment on this thread yesterday, and apparently got put on the list for email replies as a result...this is a copy of the comment that blogger had repeatedly rejected:

Here's a copy of the comment I posted after Monday's close:

WTI closed at $103.01 today, down another $6.32 from Friday, and it had briefly traded under $100. 

You should all be able to tell from this oil price graph that it was priced just over $90 two weeks ago, ran up a record $24.09 in one week to $115.68, then hit $130.50 last Sunday before tumbling back to below $100 earlier today.

In comments at Angry Bear last week i pointed out that the oil companies have no control over the price of oil, that they have to take the price set by speculators

John Kemp, senior energy analyst at Reuters, keeps track of trading in oil by hedge funds each week...here's what they were doing before the price run-up began:

Hedge funds anticipate oil price spike, possible recession: Kemp - (Reuters) - Oil traders are anticipating a sharp spike in prices that will likely bring on a business cycle slowdown after Russia’s invasion of Ukraine was met by severe sanctions that are disrupting the country’s petroleum exports.Hedge funds and other money managers purchased the equivalent of 16 million barrels in the six most important petroleum futures and options contracts in the week to March 1, according to exchange and regulatory data.Portfolio managers remain strongly bullish towards petroleum, with a net long position of 731 million barrels, which lies in the 65th percentile for all weeks since 2013 (https://tmsnrt.rs/3hH1BJv). Bullish long positions outnumber bearish short ones by a ratio of almost 7:1, in the 84th percentile, but the overall position has not changed much since the middle of January.Last week’s position changes were driven primarily by the reduction of previous bearish short positions (-20 million barrels) rather than creation of new bullish long ones (-4 million barrels).

Their "net long" position of 731 million barrels is interesting, because as i've previously reported, our commercial supplies of crude oil in storage fell to 411,562,000 barrels on March 4th which means that hedge funds were holding 178% of all of the oil that was available.

So what happened after that? As John Kemp documented earlier today:

Hedge funds slash oil positions amid extreme volatility: Kemp -- Investors slashed bullish bets on oil last week as prices surged to multi-year highs, the economic outlook deteriorated, and extreme volatility made derivatives positions more expensive to maintain. Hedge funds and other money managers sold the equivalent of 142 million barrels in the six most important petroleum-related futures and options contracts in the week to March 8. Last week’s sales were the 11th largest out of 469 weeks since March 2013, according to records published by ICE Futures Europe and the U.S. Commodity Futures Trading Commission. Portfolio managers sold Brent (-97 million barrels), European gas oil (-23 million), U.S. gasoline (-13 million) and U.S. diesel (-11 million) and were buyers only of NYMEX and ICE WTI (+2 million). The selling was dominated by closure of existing bullish long positions (-114 million barrels) rather than initiation of new bearish short ones (+28 million), consistent with a risk-reducing strategy. Funds ended up with a net position in the six contracts of just 588 million barrels (45th percentile for all weeks since 2013) down from a recent peak of 761 million barrels (70th percentile) on Jan. 18. Bullish long positions outnumbered bearish short ones by a ratio of 4.76:1 (61st percentile) down from 6.24 (80th percentile) in mid-January (https://tmsnrt.rs/3tXSCsU). In recent weeks, the record backwardation in futures prices, accelerating rise in spot prices, and increasing day-to-day volatility have been signs of a market under extreme stress and likely to reverse course. Soaring oil prices have been part of a broader increase in the price of raw materials, manufactured items and freight charges which has raised the probability of a recession within the next 12 months. Reflecting the deteriorating economic outlook and volatility costs, distillate positions were cut to 85 million barrels (67th percentile) last week down from a recent peak of 144 million barrels (85th percentile) five weeks earlier.

So it appears the hedge funds have been on the winning side of both the price runup and its recent drop but it's important to recall that futures market trading is a zero sum game, and oil companies trying to set their own positions in the middle of all that trading were most likely losers.

And now here's the comment I posted yesterday morning:

April WTI is now trading at $94.30, so it has now risen from $91.30 to $130.50 back to $94.30 in a little over 2 weeks.

I don’t know, but my best guess would be that the hedge funds that drove the price up are now short, forcing those who are long in this heavily margined market to sell, driving prices even lower, and hence increase the profits of the shorts who initiated the recent price action.

This would be analogous to, but the opposite of, a short squeeze.

Or perhaps things are getting back to a bit more "normal."