Crude & coffee reversals

COT

Crude oil and coffee set commercial trader net position records in November. WTI crude oil set records in both net and total position sizes. The WTI market has remained under $60 per barrel since November of 2015. May of 2016 saw the Baker Hughes rig count bottom at 318. There were nearly 1,500 rigs up and running in Q4 of 2015 when oil prices began falling precipitously. Currently, about 750 rigs are operating. This metric has been steady since early May of 2017. 

However, efficiency gains in fracking are forcing recalculations of the final output numbers compared to the number of rigs. U.S. oil production for December of 2015 was roughly 285K barrels. The production was tied to the 1,500 rigs operating at that time. Current production is matching that with half the rigs in operation.

Crude oil’s flirt with $60 per barrel has drawn an inexplicably large speculative bid. Speculators accumulated nearly 200K contracts between mid-October and the beginning of December. These purchases pushed their ratio of long vs. short positions to nearly 5:1. The only time this ratio was higher was in June of 2014. Speculators maxed out their long positions at more than 6:1 just before the price collapsed. Speculators nearly reached 5:1 last February when the market made its yearly high. The COT ratio won’t tell you when a trend is starting but it’s a good indicator of when one may implode. Commercial traders appear confident crude will remain below $60 per barrel going forward.

The coffee market is my wildcard for 2018. Coffee has been on a downward trend for several years; even the rally of 2014 was a bull trap. Supply has been plentiful, and producers sold their forward production on every rally. The inventory has slowly been digested, and record-setting commercial buying by the roasters shows the market is moving towards tightness. News reports have shown that Brazilian cargo shippers are reducing their coffee capacity by 20%. Therefore, it was no surprise that the firm commercial bid nailed the ending stocks report, which came in at less than 50% of the 2016 carry-over stocks. 

Brazilian coffee growers have been dealing with drought, while the Colombians have had too much rain. Finally, a growing case for La Nina global weather patterns through March could provide the catalyst for a volatile move higher fueled by the offsetting of record speculative short positions. 

The COT report is a primary tool to illustrate market extremes. Both the crude oil and coffee markets are providing setups we look for in calling significant reversals. We expect crude oil to fall in line with producers’ expectations and coffee to rally as roasters set new record long positions.  

About the Author

Andy Waldock, owner of the brokerage firm Commodity & Derivative Advisors and the subscription service COTSignals.com, is a third generation commodity trader with over 25 years of experience on all of the main U.S. exchanges.