In this report: C.O.T breakdown. Spreads for the win!
Articles
Ukrainian attack damaged 10% of Russia's strategic bombers, Germany says
Alberta Wildfires Shut About 7% of Canada’s Oil Production
Saudi Arabia Wants More Super-Size OPEC+ Hikes
Oil Traders Flock to Niche Options Market to Bet on Glut
Trump says Iran "slow-walking" after negative response to U.S. nuclear deal offer
View
It is not only my view, but the reality, that the oil market at this early stage is into backwardation through 2025 (near prices higher than later prices. Inferring immediate demand is higher). As discussed last week, we have a distinct contango in 2026 (near prices lower than later prices-inferring no immediate demand)
So why is this? The level of uncertainty over trade war tariffs is so high that the global energy complex has decided to price out an uncertain 2025 outlook and look into next year for stability. Let the Trump dust settle. This puts trade volumes for the rest of the year (and as has been so far) as very low in nominal terms. From a traders’ perspective, it means if you are not too familiar with how to hedge against this uncertainty, you will stay out of the market. This is something we have seen so far this year on the C.O.T reports from the small spec side. Below, we can see they are coming back just a little to market.
It is my view that we go lower. Despite me looking for downside off the open last week, the market rallied off the back of Ukrainian drone strikes and Canadian wildfires that occurred after my posting. The structure of the market remains weak, with littleto no justification for WTI above $65. I don’t feel so bad getting last week wrong for 2 reasons.
1: The best oil analyst in the market, Paul Sankey, was also looking for much lower oil coming into last week. However, like me, he was quoting on Monday that the Ukrainian drone attacks and fires in Canada were enough to negate the OPEC+ Production 411kbpd production increase.
The Iranian talks situation is turning sour. Talks are not progressing- see Articles above.
There is a lot of noise about declining rig counts in the U.S., however this is not the bullish factor you might think it is. As previously flagged in ‘Cap Ex baby, Cap Ex’. Do not fall for this false flag op! They can work down the D.U.C.s for another while on little capex.
In short, don’t believe the bull or bear hype. We are at the top of a range. But I’m near-term bearish. I think the highs of last week can not be sustained. Let’s see.
C.O.T WTI
All charts below are generated from proprietary Duggan Capital software tools based on C.F.T.C data.
Small specs
A nice relative WOW increase of 90.7% however the small specs are coming off of a very low base of involvement.
Seasonally, smalls are under positioned for this time of year, however they are net long.
Large Specs
The Long/Short. There is not much of interest in the position changing here on large specs. The name of the game is to be light on delta risk .i.e not subject to outright front month volatility. If you aren’t spreading your oil risk, you are just another ‘glove box cowboy’.
If we look at the position change WOW in number of contracts, we can see that large specs raised their positioning on both legs to overweight short. This fits in with the thesis that they are spread short the calendar. i.e. Short July 2/Long August 1.
What is interesting is the spread positioning is where it is at. Bloomberg also noting that calendar spreads on oil increased a huge amount this month. (See above
Trade
There is a bullish sentiment now in the price action, propelled by rising tensions on Ukraine/ Russian front. Couple this with declining rig count perceived, not actual) supply risk, and you have upside momentum. I’m not too enthusiastic about partaking in this, but I am growing an appetite to sell this market from much higher to then hold into the first week of September where we seasonally can rally.
On the seasonal rally, it must be noted, as it was last week, that it appears the market is dragging all seasonal narratives forward by about 3 to 4 weeks. So, the seasonal rally in September may initiate in the first week in August. I will stay nimble on this view.
I have to say, if the kids want to have a go at a rally here to YVWAP, I’m not going to be foolish to stand in front of that, but I will sell down on them at $67.35. Its too expensive for the current dynamic. Sell high/Buy Low Rodders!
A short one this week, but we are in a wash of narratives that I covered 2 weeks ago now. If you don’t stay passive and nimble in these markets, you are either staying wrong or staying afraid. Choose wisely.
If you are interested in learning how to spread trade commodity markets or develop your trading edge, give me a shout. Otherwise, I’ll see you out there!
Trading is waiting. Waiting is trading.