American producers who have added volume equivalent to the entire Nigerian output in the past 12 months, appear to be the principle change in dynamic.
As commodity trading has risen in algorithmic demand over the last year or so – propelled by the excitement of a strong dollar- the market trading position has also grown in importance. Last December the commercial hedgers (known as the smart money) were very short of Crude (Chart 1).
The non-commercial speculators were diametrically positioned, punting enthusiastically on higher prices. They have had to cut those positions quickly and it has no doubt been very expensive in doing so (Chart 2).
Chart 1
The charts shown are 5-year charts, so show the intense differential in positioning between hedgers and speculators. This shift back to neutrality between those vying factions has no doubt contributed to the speed of the move.
So, we now move into the winter fuel heating season. We will have to wait for a few weeks to know how that is going to affect the fine balance, but for the time being, most of the news is now out in the open. Intense down moves, in recent oil trading history, have led to 3 months+ of sideways churning, after a small rally. If we follow that path this time, it will be the weather in the winter that dictates where we go next. The trading game looks played out.
The fall in oil can make a difference to the inflation outlook and consequently have a bearing on US treasury yields. Consequently, it is interesting to see how the smart money hedgers have also been cutting their treasury shorts quite aggressively since the beginning of November. Their positions here also look more neutral.
Chart 2 Source: QTS
As for oil equities, with such a commodity set back, they are an easy place for over committed equity fund managers (all of them) to sell and raise some valuable cash. Oil stocks, despite their yield, which of course is threatened by lower oil prices, have fallen by more than most other asset classes and prop up the list of worst performing sectors. As of November 20th, no fund sector was in positive territory (using Fidelity’s fund span), with energy funds the worst.
With many oil equities showing their largest share trading volume in years, they too might earn a respite for a couple of months.
Andy Ash E:
andy.ash@
admisi.com
Source: QTS
9 | ADMISI - The Ghost In The Machine | November/December 2018
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