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Schork Oil Outlook: Bears Beware—Proceed With Caution

Stephen Schork, Editor, The Schork Report

Energy prices were strong yesterday - and who knew so many people in the U.S. burn crude oil to heat their homes? NYMEX natural gas, which is primarily used in the winter for residential space-heating demand, spiked by $0.312 an MMBtu. At the same time, crude oil, which is primarily used for transportation demand (after you go to the extra expense of refining it) rose by the equivalent of $0.369 an MMBtu. (Yes…the percentage gain in natty was much greater, but you catch our drift.)

Yesterday’s strength in the natural gas contract notwithstanding, it would appear traders’ open interest peaked on the 15 thof December and has been declining since. Traders could begin to come back if the weather remains colder than forecast, but equally keep in mind that winter demand will soon peak and decline as we enter Spring. As far as this Friday’s CFTC report goes, another pullback would signal further weakness in prices, and turn yesterday’s bullish jump into a dead cat bounce.

  • Open interest in the combined position on the NYMEX and the ICE rose 2.73% to 1.688 x 109 contracts.  According to the CFTC’s new reporting classification system, length held by swap dealers and money managers grew by 1.55%, a bullish indicator, to 368, 618 contracts. Meanwhile length held by commercial entities for hedging purposes grew 1.132% to 336, 129 net short contracts.
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    The increase in length held by swap dealers and money managers i.e. the non-commercial speculators, is an ostentatiously bullish indicator. The chart of the day in today’s issue of shows the relationship between the NYMEX price and net length held on the NYMEX. As of the latest release, net length on the NYMEX was essentially unchanged week on week (from 282,825 contracts in the previous report to 282,800 as of last Tuesday).  That’s the smallest weekly change all year, and can partly be explained by the shortened holiday trading weeks. But more interestingly, were traders holding back to watch for a momentum play? 

    We hypothesis that if prices do cross the $84-$85 barrier this week, a lot of the traders who held off buying in last week will pile in this week, adding further momentum to the rally. We won’t know for sure until Friday’s release, but would advise caution to any contrarians looking to sell strength.

    • Open interest in the heating oil pit grew by a large 2.5% in the CFTC’s latest report. As of last Tuesday, the amount yet to be offset at the New York Harbor contract came to 314, 896 contracts. This brings the December 2009 average to 24.5% above 2008 and more importantly (given that investors were generally MIA in Dec 2008) 16.3% above 2007. 

    We also saw a huge increase in net length held by swap dealers and money managers, which grew 18.3% to 104, 825 contracts. As the graph in today’s issue of highlights, that places net length 33% above the same time in November. This is bullish in the short term, which explains why heating oil was one of yesterday’s largest gainers but we are less optimistic in the long run. After all, traders will take money off the table by selling the contracts they buy. And a large buying spree is followed by… well, we will be looking very closely at the heating oil net length over January. A failure to hit higher highs will be a strong indicator for a sell off.

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    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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