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Schork Oil Outlook: Speculators Overplayed Their Hand?

Monday, 14 Mar 2011 | 1:58 PM ET

According to Friday’s Commitment of Traders (CoT) report from the CFTC, speculators (managed money) owned a record 274,235 contracts of WTI crude oil on the Nymex. That is a 68% increase in three weeks. Total net length held by all non-commercial interests rose to a record 275,582 contracts; a 92% (!) increase since the end of January.

At the same time, speculators in the natural gas market on the Nymex are going in the polar opposite direction. Two Tuesdays ago money managers were net short by a record 207,413 contracts and non-commercials were short by a record 259,831 contracts. As of last Tuesday, the respective disposition had fallen to 191,186 and 254,514 contracts.

We always find it helpful to put stats like these into perspective. For instance, in the 2011 reference case, the EIA projects natural gas demand from the residential sector at 4.88 quadrillion Btus (4.88×1015) and demand of 3.29×1015 and 7.12×1015 Btus for the commercial and industrial sectors, respectively.

Consider that one Nymex natural gas contract contains10,000 MMBtus. Given how many Btus the non-commercials have sold forward, they could supply the residential sector for the first 190 days of 2011. At 7.12×1015 Btus of projected demand, the non-commercials could supply the entire industrial sector for the first 130 days of 2011 (See today’s Chart of the Day on today’s issue of The Schork Report).

Falloff in Crude Demand?
Discussing the impact of the Japan disaster on crude oil prices, with Larry Levin, TradingAdvantage.com; Stephen Schork, Schork Report; and Jane Foley, Rabobank. "We have a template for severe correction," says Stephen Schork.

As we move to the oil market, the comparisons are even more absurd. The EIA estimates storage capacity at Cushing, OK, where barrels are delivered against the NYMEX, at 45.9 MMbbls. A WTI contract on the NYMEX contains 1,000 barrels. At 275,582 contracts of net length, the non-commercials can fill the NYMEX hub 6× over!

More to the point, the Strategic Petroleum Reserve (SPR) is currently maxed out at 726.6 MMbbls. Imports for 2011 are projected at 9.51 MMbbls/d. At this rate the U.S. has 76 days of import cover sitting in the SPR. However, speculators on Wall Street are long 275.6 MMbbls or approximately a month’s worth of imports.

So here is our suggestion for Washington, instead of tapping into the nation’s oil in the SPR, why don’t you first go to Wall Street and make a bid for all of that oil they “own.”

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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.

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