Blame Wall Street for $135 Oil on Wrong-Way Betting (Update3): “Oil's rally to a record above $135 a barrel came as traders bought crude to cover wrong-way bets that prices would decline, according to data from the New York Mercantile Exchange.
The number of outstanding futures contracts, known as open interest, fell 8.1 percent in a week to 1.36 million at the same time that prices rose 2.6 percent, the data show. Falling open interest and rising prices are signs that traders are buying to exit so-called short positions that would profit if oil fell, and lose money as they rose.
“In a market like today, which is trending higher while open interest is falling, it's a sign that money is moving out of the market,” said Stephen Schork, president of Schork Group Inc. in Villanova, Pennsylvania. Open interest in Nymex crude futures peaked this year at 1.5 million on March 13.
Crude for July delivery touched a record $135.09 a barrel on the Nymex today. Oil futures later dropped on signs that a 15 percent run-up in prices this month isn't justified by stockpiles and demand. Oil fell $2.36 to settle at $130.81 a barrel. Prices have more than doubled over the past year.
Open interest has been sliding for months, after the number of outstanding crude futures reached a record 1.58 million on July 16, 2007.”
Futures contracts are a zero sum game. There needs to be a buyer and a seller for each open contract. Falling open interest means money is indeed leaving the market. The media has been accusing speculators of running oil massively higher. The reality is that since July 16th 2007, money has been flowing OUT of the oil as speculators reduce their positions. Granted, it would appear that shorts are getting out first, but net falling interest of this magnitude is probably foreshadowing that this oil price spike is nearing the end… and will probably correct sharply lower in the near future.
“In the last year, non-commercial market participants have raised bets on rising prices, known as long positions, by 37 percent to 263,378 contracts, the Commodity Futures Trading Commission said May 16.
The rush to buy back contracts may be linked to the record number of short positions that had been built up in recent weeks by small-sized speculators, which the CFTC refers to as “non- reportable” traders because their holdings are small. Those investors held 123,194 futures contracts betting oil futures would fall in the week ended May 6, an all-time high, and 47 percent more than the number of bets they'd placed on rising prices.”
Those with deep pockets are long and the weak hands were short. Naturally the weak hands get squeezed out first. The retail shorts have been blown out. That eliminates in large part the fuel for this parabolic move.
Maybe we can hammer out a top around here somewhere... Money has been flowing into inverse energy ETFs (DUG for example), indicating that money is for the first time attempting to call a top. Oil and Gas shares have fallen even as oil blew through $130 and immediately tagged $135.
Big energy companies, such as Exxon Mobile (XOM) failed to sustain new highs even as oil rallied hard. Something is up. Pop, and drop. XOM broke resistance and then immediately FAILED. Hmmm...
These prices exceed even the pain threshold of politicians. With their economically illiterate constituents complaining loudly, the time is ripe for the government to do something tremendously stupid in a vain attempt to bring down oil prices.
Although we may not yet know what it will be or when it will be done, you can bet on some kind of brain fart becoming official policy fairly soon…
… because on CNBC prices above $130 have resulted in new name and picture appearing on the screen called: The American Oil Crisis.
Now that it’s a crisis, look out.
I’ve been wrong on oil before (although I managed to trade these opportunities just fine):
Commodities Unravel, Confidence Collapses
Massive De-Leveraging Slams Commodities
Parabolic Commodities: The End is in Sight
Oil and Global Decoupling Theory
Crude Hits $100, Equities Freak