The bullish stance by financial speculators is well documented, as readers well know, we have been bleating about this topic in The Schork Report for months now. In 2010 money managers (CTAs, CPOs, et al.) average net length in Nymex crude oil futures was approximately 133,000 contracts. Through the first five months of this year their length is averaging 225,000 contracts.
Back on March 08th speculators bullish position hit a record 274,235 contracts. That was enough oil to replace 14-in-15 barrels of the sweet crude oil currently sitting in the Strategic Petroleum Reserve. It was also around 6× the capacity of available storage at the Nymex hub in Cushing.
In the gasoline market the Funds were just as bullish. In 2010 their net length in RBOB futures averaged 44,502 contracts. However, as of the Labor Day holiday in early September (i.e., the end of the 2010 driving season) speculators were actually short gasoline by 1,553 contracts.
From then, until the first of week of this year, their position morphed to record length of 69,906 contracts. Up through last Tuesday speculator net length is averaging 60,906 contracts.
That’s a lot of gasoline. In fact, it is around 2½× the amount of gasoline sitting in the Mid-Atlantic (PADD IB, inclusive of the Nymex hub in New York Harbor).
Along this backdrop it is little wonder that fund managers have been knocked for a loop. A month ago 30-day implied volatility for the June RBOB contract traded at 24.6%. However, because of the meltdown (then melt-up, then melt back down) over the last seven sessions, the 30-day historical volatility was much larger (2×), 49.98%. In other words, the funds never saw the selloff coming.
As such, 60-day implied volatility in the September contract has increased by around 800 bps (33.4%) over the last three weeks. This rise in implied volatility occurred along with a reversal in the forward skew, i.e., implied volatility on out-of-the-money puts relative to the corresponding calls has shifted from a discount to a premium.
As written in today’s issue of The Schork Report, bullish confidence is waning and the market is paying up to protect against further downside momentum.
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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.