CHARTS: The extreme positioning that led to the mammoth squeeze in crude oil last week

Photo: Getty Images

While it has fallen fractionally this morning, the crude oil price enjoyed a spectacular rally late last week, jumping from below $38 to above $44 a barrel in the space of just two trading sessions.

Combined, the two-day increase was the largest since the global financial crisis.

According to Dave Lutz at JonesTrading the huge rally in crude had to do with one thing: people in the market had become massively short oil and those shorts were getting called.

“Since mid-June, hedge funds have accumulated one of the biggest short positions in U.S. crude on record, equivalent to almost 160 million barrels of oil, up from less than 60 million, according to data from the U.S. Commodity Futures Trading Commission”, said Lutz.

The chart below, from ANZ, shows the build up of speculative short positions in NYMEX crude in recent months.

ANZ uses data from the US Commodity Futures Trading Commission’s commitments of traders report which reflects speculative trader positioning across financial products, including crude oil.

Positioning in crude, shown by the light blue line, was as at the close of trade on Tuesday August 25, shortly before the surge in the crude price occurred.

Unlike positioning the price, reflected by the dark blue line, is from the close of trading on Friday, and reveals the sharp spike higher seen late last week.

This, along with extreme positioning in US dollar longs on the Intercontinental exchange shown below, provides a simple explanation as to why the crude oil price staged such a spectacular rally – one-way positioning in the market.

In early trade Monday morning front-month WTI futures are down 63 cents, or 1.39%, at $44.59 a barrel.

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