Crude Oil Commercials at Record Short Exposure

On April 10, 2017 I penned a piece called Taking A Look at Silver where I wrote: "When watching COT levels each week, what is important to me is the trend in the positions that Commercials and Large Specs hold. But what is also important to me is when extreme positions occur." 

A week later, as the chart below shows, silver peaked at $18.65 and started a slide that took prices to $14.34 at the low in early July.

Figure 1: Silver Continuous Contract

This reaffirmed my belief that it is important to pay close attention to COT data, especially when it is making new 52-week or all-time record readings. Today, crude oil COT data is at an extreme, meaning it is time to pay attention.

The chart below shows that Commercials are at a new 52-week-high in the number of net short futures contracts they hold, while Large Speculators (aka managed money and hedge funds) are at a 52-week-high in the number of long contracts they hold.

Figure 2: Crude Oil Net Commitments of Futures Traders

Commercials, often referred to as the 'smart money,' are hedgers that deal with the underlying commodity as part of doing business. Commercials are large operators with very deep pockets, and they are exempt from position limits and are allowed to post smaller margins (i.e., they are able to use more leverage). It's important to note that this snapshot of commercial positions is as of the close Tuesday, January 2, 2018 and are reported by the CFTC on Friday afternoon of the same week.

When watching COT levels each week, what is important to me is the trend in the positions that Commercials and Large Specs hold. However, what is also important to me is when extreme positions occur. Looking at the chart below we see commercial positions back to 1993, and what jumps out at me is the fact that the current commercial short position of 1,414,461 short contracts is a record short position.

Figure 3: Crude Oil Hedgers Position

The weekly price chart below shows that $WTIC has rallied nicely from its early January 2016 low, and is sitting at the 2015 high.

Figure 4: Light Crude Oil Continuous Contract

The bottom line is that investors are excessively optimistic while Commercials are at a record level of bearishness. 

The price chart (Figure 5) has a couple of divergences (RSI, MACD, volume) and might be set up for a decline, or correction at a minimum. What is unknowable is whether a pullback will be short and shallow or long and deep. 

Figure 5: Crude Oil Continuous Contract