Is the talk of a bubble in stocks, bonds, and oil double talk? Alan Greenspan is warning of a bubble in stocks and bond king Bill Gross is warning about a bubble in bonds and now some analysts are saying that oil is in a bubble. If Alan Greenspan is right about the stock market bubble, then maybe oil has a problem but the basis of these predictions of an oil bubble based on a record hedge fund open interest is a dangerous misreading of the commitment of trader’s report.
One of the world’s most foremost authorities, on the Commitment of Traders (COT) report, is Gary Kamen of “Trends in Futures”. Gary is the author of the book “What Lies Beneath the Trends” that is all about how the COT report and what the players are doing impacts the markets. He says the reason the market keeps rising, even as large speculators and hedge funds increase positions to record heights, is because who is on the other side of the trade.
Kamen says that swap dealers have amassed the biggest short position in history as they hedge oil for the trade of crude quality differentials as well as hedging ETF’s. These swap dealers, in many cases, are much larger than the spec side and are among some of the biggest players in the industry. Names like JPMorgan, Bank of America, Citi Corp, as well as the newest bank to up their crude oil forecast to match the earlier predictions by me in the Energy Report, Goldman Sachs.
In fact, Kamen says that this balance between record hedge fund longs versus record swap dealers short is bullish, not bearish. It reflects a very tight crude oil market and extremely strong demand. So, in other words, this COT report, with a historic spread between swap dealers and large hedge funds, is more evidence that the global oil market is a supply versus demand deficit. Kamen says you can see clearly why crude has moved like it was based off this COT report. If this buying and selling were not taking place, oil would not have moved like it has.
Many analysts are missing this because they are looking at the report the old way before swap trading and ETF’s became part of the crude oil trading equation. He says that there is a 100% correlation between the newer “Disaggregated” report and the old “Legacy: report. Add the two numbers in the bottom boxes and you get the exact number in the top box.
The legacy report shows that commercials are in the historical net short territory. But the more transparent Disaggregated report shows who really is the strong sell side in the rally from Summer/Fall until today are the swap dealers. Interesting to note USO started April 2006. Today their AUM sits at $2.451 billion (long only futures contracts). Also, note Swap Dealers (Big Banks) did not trade crude before 1999.
If you ignore this breakdown you would assume that the rally has been built on a speculative flurry but as you can see the so-called commercial short position is not nearly as short as it seems. In fact, if you go back a few years many analysts were blaming speculators for driving prices higher when they were misreading the COT report and the market fundamentals. The run-up in oil has not been driven by speculators but has been driven by soaring demand and tightening global supply.
That demand was evident in Yesterday’s Energy Information Administration (EIA)report. The EIA reported that U.S. crude supply increased by 6.776 million barrels, much larger than the 900k Bbl estimated. Yet, most of the draw was in the Gulf Coast where winter slowed refineries and port operations. In Cushing, crude supply fell by 2.224 million barrels. Yet, the real story yesterday was soaring product demand. Demand-based on a strong economy, cold weather and strong consumer confidence and factory demand. Over the last four weeks, implied gasoline demand was up 7.1% compared with the same time last year, while distillate demand surged 13.3%. Super strong demand!
The EIA reported gasoline down 1.980 million barrels vs. estimate of a build of +2,000k. Distillates fell by 1,940k million barrels vs est. -700k. 10 Million barrels and counting! The Wall Street Journal Reports that U.S. oil production tops 10 million barrels a day for the first time since 1970. U.S. crude oil production broke 10 million barrels a day in November for the first time since production peaked in 1970, at the start of a decade's long decline. Even though many are skeptical of that number, it is great news because the way demand is going and the global oil supply deficit, we will need every barrel we can get our hands on.
The UPI reported that French energy company Total said Wednesday it made what it considers the largest discovery its ever made in the U.S. waters of the Gulf of Mexico. Total said Wednesday it ran through a deep column of oil while drilling in its Ballymore prospect in the eastern U.S. waters of the Gulf of Mexico. In declaring the discovery, the company said it was already considered a commercial prospect. Good, we need it after oil discoveries hit a 70 plus year low last year.
Welcome to the bull side! Goldman Sachs raised their oil price forecast by a third in the latest conversion of a former oil bear to the bull side. The bank's three, six and twelve-month Brent oil price forecasts were raised to $75, $82.50 and $75 a barrel respectively, from $62 previously.