Looking at the latest Commitments of Traders report, bullish extremes continue in long crude oil, long British pound and long euro speculator net positions. While long crude oil and British pound positions have grown, long euro positions have fallen this week.
The purpose of this report is to track how the consensus is positioned across various currencies and commodities. When net long positions become crowded in either direction, we flag extended positioning as a risk. Crowded positions do not suggest an imminent reversal, but should be considered as a significant risk factor when investing in the same direction as the crowd. This is shown below:
CFTC COT speculator positions (futures & options combined) – January 16, 2018
Notable extremes are bolded, and are highlighted when speculator positioning is more than two standard deviations above trailing 1-year and 3-year averages.
The biggest changes in net positions (as a proportion of open interest) this week includes rising Australian dollar and falling US dollar index positions. Speculators continue to pile into the Australian dollar after the currency began rallying in mid-December. In our last daily update, we wrote that AUD/USD looks fairly overbought on a daily chart. Looking at the US dollar index, speculators are now net short the contract as USD continues to weaken. Thanks to strength in the euro, British pound and crude oil, the US dollar remains deeply out of favor.
Another week, another build in long crude oil net positions
This week, speculator net positions in long crude oil have increased by 46,895 futures & options contracts. Despite repeated warnings that the position has become a consensus favorite, few can resist chasing bullish momentum. Looking at the fundamentals behind the crude oil market, demand growth continues to strengthen at a faster rate relative to supply growth.
Thanks to strong global growth, crude oil investors continue to project strong demand in the near future. Looking at supply, OPEC/Russia production limits coupled with slower-than-expected US shale oil growth has kept supply growth in check. In addition, US crude oil inventories continue to fall faster than consensus estimates, suggesting that the balance of demand versus supply favors higher crude oil prices.
Crude oil net speculator positions and z-scores based on 3-year trailing averages are shown below:
Long crude oil net positions looking fairly stretched
As can be seen from the graph above, net long positions in crude oil remain at multi-year highs. Looking at 3-year z-scores, the last time long crude oil was three standard deviations higher than the trailing 3-year average was in February 2017. After peaking around $54 at the time, WTI crude prices weakened below $45 by early June. While prices soon roared back (thanks to underlying fundamentals working in favor of the commodity), excessive speculator sentiment in either direction is a fairly reliable predictor of a short-term correction.
As crude oil positioning once again hits extremes, we continue to call for a short-term pull back in prices. Over the longer term, crude oil remains in a bull market thanks to optimism for global growth and limited supply growth from US shale oil and self-imposed OPEC/Russia production limits. Until supply exceeds demand, our long-term outlook on crude oil remains bullish.