The big short

December 14, 2015 09:02 AM

Oil traders have one of their largest December short positions in history as Iran vows to pump more oil into an oversupplied market.

On top of that, natural gas crashed to the lowest level since 2002 as El Niño sucks demand not only from oil, but natural gas too. The bear is winning the oil battle as OPEC and Mother Nature are on its side, but remember that crashing prices have consequences in the long run.

Oil prices took out $35.00 a barrel early this morning, driving prices to another seven-year low. Now the next support just happens to be the low made during the darkest hours of the financial crisis—$32.70—in Jan. 2009 and $32.40, the low in Dec. 2008. The weakness is being driven by very bearish sentiment along with some comments out of Iran, not to mention there's just a lot of oil out there.

Bloomberg News reported that Amir Hossein, the deputy oil minister for international and commerce affairs, said, "There’s 'absolutely no chance' Iran will delay its plan to increase shipments even as prices decline." These comments come as it appears Iran is already raising exports. 

Reuters reported that, “Iran's crude oil exports are set to hit a six-month high in December as buyers ramp up purchases in expectation that sanctions against the country will be lifted early next year. Iran is on track to ship 1.26 million barrels a day (bpd) of crude this month, according to an industry source with knowledge of the OPEC member's tanker loading schedule. That preliminary number, nearly a quarter higher than levels just two months ago, could stoke worries over a global supply glut that have intensified since the Organization of the Petroleum Exporting Countries abandoned its output ceiling on Dec. 4.”

The OPEC production war is continuing and it is taking its toll on U.S. producers. On Friday, the Baker Hughes U.S. rig count fell by eight rigs from last week to 709, with oil rigs down 21 to 524 and gas rigs down seven to 185. That puts the U.S. rig count down by 1,184 rigs from last year at 1,893, with oil rigs down 1,022, gas rigs down 161 and miscellaneous rigs down one. Even the offshore rig count fell by two to 23, down 37 rigs year over year.

This comes as the hedge funds amass a record short position in the oil market. CFTC data showed that the non-commercial contracts of crude oil futures, traded by large speculators, traders and hedge funds, totaled a net position of +197,874 contracts in the data reported for Dec. 8. This was a change of -10,604 contracts from the previous week’s total of +208,478 net contracts for the data reported through Dec. 1, and an increase in shorts for the fifth week in a row. The non-commercial long positions in oil futures increased by 4,506 contracts, but were overtaken by the short positions that gained by 15,110 contracts to total the overall weekly net change of -10,604 contracts.

With all of these shorts in the market, it will be interesting to see what will happen if they try to cover at the same time.

Of course, Mother Nature is not helping demand. Natural gas prices plunged to the lowest levels since 2002 on warm temperatures. It was 60 degrees on Sunday as we watched the Bears lose yet another game.

We have been wrong on the direction for oil, but still believe that the sell off will create the environment for a long-term sustained bull market. This year oil has been affected by double dip recessions in Europe and Japan and the recession in the EU that was self-inflicted by Greece. China’s meltdown raised fears about demand growth even though their imports remain strong.

But as the saying goes, nothing cures low prices like low prices, so we expect to see these low prices start to kick up demand. It should exceed the expectations of all the major reporting agencies. We are still using market weakness to position down the curve.

About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.