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Schork Oil Outlook: Commitment of Traders—Clear as Mud

Stephen Schork, Editor, The Schork Report

In a push for greater transparency in trading, the United States Commodity Futures Trading Commission’s (CFTC) weekly Commitment of Traders (COT) tell us how many contracts were traded by commercial and non-commercial players, i.e. speculators. The assumption being that price movements are dependent upon the number and type of trades.

So, for instance, rising open interest is indicative of money coming in - if a rise in price is accompanied by a rise in open interest then the bullish trend is confirmed.

But if a market is rising while open interest is falling then the rise in price is tenuous with the underlying assumption that shorts are being squeezed.

In the last week we’ve seen crude oil and natural gas prices fall after significant gains. By looking at the open interest, we hope to identify whether those prices will recover or continue trending lower. Today’s issue of illustrates the correlation between open interest and crude oil prices. We can see that summer 2008 saw a correlation around 0.83 as prices and interest fell sharply with investors leaving the market for safer investments. At the start of 2009, correlation was negative as traders continued to unwind the 2007/08 dollar carry trade. In September 2009, prices and interest both started rising, correlation became positive and the value of watching open interest became clear.  Open interest peaked at 1.26E6 contracts for the week ending 9th of October and started declining, but prices kept rising. That should have been a very bearish signal, and two weeks later prices retraced from $80+ to $77 as of last Friday.

Correlation has started trending upwards again while open interest is up 3.7% to 1.23E6 contracts.

That means if open interest continues to rise we should be looking at strength in crude oil, but the inverse also holds true. In a similar vein, when natural gas prices were hitting highs of $4.70+, open interest was trending lower. Open interest as of last week remains at the same levels as it was when prices were just $4.03, implying further weakness in natural gas.  Outside of these two contracts, the CFTC’s report covers several dozen contracts, some of which are strongly interrelated.

For instance, in the correlation matrix for crude, natural gas, heating oil and gasoline open interest in today’s issue of , we can see that open interest rose in tandem across the energy complex. As illustrated, this does not appear to be the case in 2009.

While crude and natural gas remain positively correlated, heating oil and gasoline are now slightly negatively correlated. Thus traders may now be choosing between specialized products instead of trading in the energy markets as a whole.

We will looking into this in more detail in the future thanks to the CFTC’s new rules splitting up noncommercial traders (such as money managers, swap dealers etc) which came in to force in September.

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

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