Commercial hedgers in the U.S. Crude oil futures (NYM.CL) market capitulated last week, switching their bias from net short of contracts to net long and lining up directly opposite to the position of the large speculators, who, according to Friday's report, based on last Tuesday's survey, were "Extremely Short" - within 10% of being the most net short they've been in the last year.
The news was greeted with higher prices, as August crude rose $1.38, to close Monday's trade at $136.74 per barrel. Examining Friday's COT report on Crude further, it finds small traders also positioned for a down move. Will the small and large specs prevail over the Hedgers? What does history tell us?
Q: What has happened when Hedgers (aka Commercials - those who operate in the physical markets for crude) switch from being net short the NYMEX Crude market to net long of it, in the month of June?
A: Over the next two days, Commercials get it wrong as Crude cracks -2.84% on average with only one instance rallying. The standard deviation of the trade is 2.2%, relatively mild by today's standards, and this helps give the trade a Sharpe of -1.28 and a t-stat of 2.2 (tested at the -1 hurdle rate). Crude might continue up, but if history is any guide then it should correct first over the next 2-3 trading days.
* Note: The net commercial position in the COT report is biased towards the long side as index fund activity is often reported as commercial activity because swap dealers on the other end of index trades hedge those cash positions in the futures market. The CFTC reports this activity in a supplemental report (CIT) for agricultural markets but not in energy.
Jason Thompson is a Chicago-based speculator focusing on electronically traded derivatives and their underlying instruments.
