As of a week ago yesterday, total net length held by all non-commercial interests trading Nymex WTI crude oil hit a record 275,582 contracts; a 92% (!) increase since the end of January. As discussed on Monday, that is enough oil to fill the Nymex storage hub 6× over.
Last year, a total of 115.3 MMbbls of Nymex spec crude oil (i.e. foreign streams that can be delivered against the WTI contract… Brent, Bonny Light, Qua Iboe and Cusiana) was imported into PADD III. Speculators are thus in position to offset 2.4 years’ worth of these imports.
That is to say, they could offset imports if they were in the business of making deliveries, which of course, they are not.
As written in today’s issue of The Schork Report, speculators now have three options… they can hold their mud, they can roll their length or they can simply liquidate. Regardless of their decision, their future is now.
Yesterday the spot oil contract on the Nymex for April delivery traded down into the 50/62% retracement range, i.e. the area that our friend Dennis Gartman dubs “The Box.”
Nymex crude oil was in a well-defined bearish trend back in the first half of last month. On February 16th the April contract bottomed at 87.09. Since then we have seen a coup d’état in Egypt, a civil war in Libya, the sickening devastation in Japan and… what has thus far sailed underneath the media radar… a military incursion by Saudi Arabia into Bahrain to quell a Shia uprising (read: contagion).
On March 07th the Nymex contract topped 106.95. To this effect, The Box is defined from 97.02 to 94.68. As goes the May contract, The Box is traced from 99.26 to 97.14. Last night the contract settled at 97.98 (!) i.e. closer to the 62% line than the 50%.
On a rolling contract basis the bulls have a little wiggle room. The Box here is defined from 95.45 to 92.74. Failure to hold this level would likely clear a path below $90. More to the point, on February 16th spot oil peaked at 85.95, but then gapped higher the following session as tensions in the Middle East flared. The low print on February 17th was 87.35…The Gap.
That’s important, just as nature may abhor a vacuum, markets certainly abhor gaps.
The Schork Report is thus advising clients that if bulls cannot defend The Box, then they face the prospect of further weakness towards The Gap.
- Read CNBC's Guest Blogs- Great People, Great Ideas...
- CNBC's Energy Page - Trends, Trades & Hot Topics
- Energy Market Overview
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.