It’s clear that many traders think crude oil prices are going higher.
According to data released by the US Commodity Futures Trading Commission (CFTC) on Friday, net long positioning among traders hit the highest level on record last week.
Net positioning is the sum of long futures and options positions held by investors — betting on price gains — minus short futures and options positions held in those same contracts, according to the CFTC’s weekly Commitment of Traders (COT) report.
This chart from ANZ shows the relationship between net positioning from speculative investors to movements in the crude oil price.
Speculative positioning is derived using non-commercial positions reported by the CFTC, something ANZ Bank says are “commonly seen as a proxy for speculative positioning as they seek to profit from movements in the asset price as opposed to hedging business activities”.
Based purely on positioning as at the close of business on Tuesday, January 17 — the cutoff for the latest COT report — never before have speculators been this optimistic on the outlook for crude prices.
While this only based off positioning in futures and options contracts, it could be used to extrapolate broader investor sentiment towards a particular asset class, in this case crude oil.
Crude oil production cuts announced by both OPEC and non-OPEC members in late 2016 — which are being adhered to in early 2017 — along with optimism over a potential boost to US economic growth following the inauguration of Donald Trump as the 45th president of the United States last week, are clearly contributing to the buildup in long positioning seen among investors.
However, while this is an understandable reaction to what is undoubtedly bullish news for crude, as the chart form ANZ also reveals, when long positioning has become stretched in prior years, it has a tendency to herald the start of a short-term pullback in prices.
This doesn’t necessarily mean the same outcome will prevail on this occasion, but it’s something worthwhile considering.