Positioned on the Floor
Positioned on the Floor
Record-short speculative positioning in crude contracts has cratered prices and climbing back from these oversold depths is expected to support the barrel higher over the coming weeks.
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Crude prices have been hammered over the past few weeks, falling more than $10/bbl from late-August levels as positioning by market speculators hit its lowest level on record.
Crude prices tend to rise materially in the month following speculative positioning troughs and in some extreme cases—that looked not unlike the lows reached this past week—by $10/bbl or more, which would today be enough to bring Brent back into the $80s per barrel.
The net Managed Money (or speculative/spec) position in crude futures and options contracts has now reached an all-time low. This historic speculative selling pressure prompted a more than $10/bbl collapse in crude prices between late-August and this past Tuesday (September 10th) as positions shifted from modestly overbid to all-time oversold, which exerted tremendous downward pressure on crude prices—above and beyond any true erosion of fundamentals in the broader oil market—and brought prices to the lowest level since late-2021.
Speculative positioning extremes tend to coincide with pricing peaks and troughs. For much of the two years, speculative positions have built up and sold off, largely driven by momentum in either direction and closely matching the tops and bottoms of crude prices bouncing in a range between $75-90/bbl (Brent basis). Speculative positions hit acutely oversold levels following the OPEC+ meeting in early June, rose to moderately overbought levels in mid-July, and have plummeted not only below June levels or even the depths of early 2020 but to levels never before seen in the industry, pulling prices below the bottom of their recent range in the process.
Crude prices are determined by a chaotic dance between realized fundamentals, anticipated fundamentals, and the often-mechanistic churn of paper positioning. A rebalancing of speculative positioning is expected and should support stronger crude pricing over the coming weeks, all else equal and barring a broader collapse in fundamental market signals. This post will focus on the “Managed Money” component of the Commitments of Traders (COT) report and, specifically, the current cratering of speculative market positioning.