While markets are increasingly uncertain as to where the crude price will head, that hasn’t stopped investors from placing ever larger bets, which just hit the highest level on record.
According to data released by the US Commodity Futures Trading Commission (CFTC) last Friday, the level of open interest in benchmark US WTI crude oil futures and options rose to 497,280 last week, the largest figure on record since the data was first collected back in 2006.
Essentially, despite uncertainty about which direction the crude price will head, speculative investors have never had so much money riding on its future performance.
“This is a reflection of a lot of conviction on both sides,” John Kilduff, a partner at Again Capital LLC told Bloomberg. “We’re seeing a battle royal between those who think a bottom has been put in and those who think we have lower to go.”
Analysis conducted by Bloomberg revealed short positioning in WTI rose by 17,299 contracts, or 9.7%, to 196,048 futures and options, just shy of the all-time high reached three weeks ago. Long positioning climbed by 12,051 to 301,232, the highest level seen since June last year.
The increase in open positioning follows a period of significant volatility in front-month WTI futures since the beginning of the year.
As the chart below reveals, there has only been two sessions – January 4 and 13 – where the front-month WTI future has not registered an increase or decline of more than 1% so far in 2016.
The average daily movement, regardless of direction, has been 4.07%, with the average daily trading range coming in at a staggering 7.02%.
Shifting expectations for US monetary policy, fluctuations in the US dollar, record US crude stockpiles, resumed crude production in Iran and constant chatter surrounding the potential for supply cuts from crude producers, along with other factors, all contributed to the significant bout of volatility, particularly since the price hit a fresh 13-year low of $US26.19 a barrel on January 20.
Volatility, already high, has the potential to become even greater given the increased level of open interest for both bullish and bearish bets.
Both sides are doubling down, amplifying the potential for a major move should one side be proven to be definitively incorrect.
With downside risks prevalent, a supply cut from major oil producers – or a definitive announcement that no supply cut is forthcoming – is undoubtedly the biggest risk facing both sides of the trade at present.
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