Since last Thursday’s end-of-quarter inspired spike, Nymex crude oil has been on an absolute tear. At the same time the natural gas bulls have absolutely refused, again, to stop playing the role of Charlie Brown, to the bear’s Lucy.
As far as the latter goes, Nymex gas for May delivery rallied from a low of 3.805 in early March to a high of 4.559 towards the end of the month (+20%). However, over the same timestep aggregate open interest trended lower, from a high of 956,442 contracts on March 08th to 879,486 contracts on March 28th.
Meanwhile, money managers (aka Wall Street) lowered their bearish bets on natural gas from a near record 207,413 contracts (a/o March 01st) to 103,984 contracts (a/o March 29th). As such, the 8% drop in open interest, accompanied by a 50% decline in net shorts held by money managers, helped to form our opinion that the March rally in gas was a function of a short squeeze, i.e., open interest was falling in a rising market, therefore, new money was not coming in; rather, old (bearish) money was being offset.
Analysts at The Schork Report have been holding a bearish bias in natural gas since the end of March. At the same time volume has increased, as has open interest. That is a sign to us that new bearish money is coming back into the market. Yesterday’s plunge and close below the 62% retracement (rolling contract basis) at 4.082 concretized our bias view.
Spot Nymex gas is down around 9% since we switched our view to bearish. That is a good thing, because since switching our view to bearish in the liquids, Nymex crude oil is up by around 5½%... and moving higher as we write. That is not a good thing. From the beginning of this year, up until mid-February (start of the troubles in Libya), spot Nymex crude oil averaged 88.69 and volume averaged in between 959K and 840K.
From the start of the headlines in Libya to the penultimate session of the first quarter, Nymex WTI jumped up to a 101.82 average, but average volume jumped down to in between 849K and 652K. Since the final session of Q1 to last night, Nymex WTI jumped to a 108.43 average, but volume is only averaging in between 587K and 491K.
Bottom line, from the start of the year until the middle of February spot Nymex oil (rolling) averaged 88.69 with a high of 93.02 and a low of 83.85. Volume and open interest averaged 899K and 1,515K, respectively.
WTI is averaging 103.03 with a high of 110.44 and a low of 89.77 since then. Average open interest has risen by 2.1% to 1,549K, but average volume has dropped by one-fifth to 712K.
Therefore, there does not seem to be a tremendous amount of legs behind the recent rally, but that is neither here nor there. Demand functions aside, someone thinks $110 oil is a buy… and it is becoming increasingly difficult to argue with them.
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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.