Energy Analysis
Crude Oil Prices vs. the Short Ratio for Large Traders' Commitments
The graph above illustrates
the inverse relationship between short-term crude oil prices (Light
Sweet Crude) and the short ratio for Large Speculator (Non Commercial -
Reporting) futures positions. The red line is the Friday closing price
for the oil futures contract (NYMEX / NYMX CL) that has the largest
number of outstanding contracts. (Usually the current front
month.) This information is available at many
on-line sources.
The blue line is a ratio of the relative amount of futures contracts that have been sold short by large speculators. It is calculated by dividing the number of contracts sold short, by the sum obtained by adding both long and short contracts. For example, if the number of long positions is 60,000 and the number of short contracts is 40,000, then the short ratio is: 40,000 / (40,000 + 60,000) = 0.40. (Note: One contract equals 1,000 barrels of oil. The U.S. uses about 20 million barrels (20,000 contracts) per day.)
These futures positions can be accessed on-line after Friday's close at: http://www.cftc.gov/dea/futures/deanymesf.htm
where they are listed under Crude Oil - Non Commercial.
The orange line shows the price of the most distant oil futures contract. (Usually about 6 years in the future.) Earlier this decade, distant futures were priced below near term prices in the belief that oil prices would return to the $20 range. In recent years they have traded closer to the near term price.
While I am not in the business of providing investment advice, the following correlation appears to exist. When there is a large short position (The blue line is at relatively high levels), the short-term price of oil (red line) appears to be at relatively low levels and is usually followed by an increase in the price. Conversely, when traders' short position is relatively low (The blue line is at low levels), the short-term price of oil appears to be at relatively high levels, and is usually followed by a decline in price.
(Added 12/12/03) The era of easy, cheap oil appears to be drawing to a close. As chronic oil shortages become more widespread, the historic relationship between oil futures and short-term price moves may end as the price of oil begins a relentless march higher - especially as measured in U. S. dollars.
(Added 9/22/06) The recent sharp reaction in oil prices has carried prices well below the previous least squares quadratic trendline. It has been replaced by a running 2-year linear trendline which should be more representative.
(Added 11/7/08) It now appears that the peak in world oil production occurred last summer. The corresponding peak in oil prices represented the world’s maximum craving for (and ability to buy) oil. We are now on the downside of production - which is being exacerbated by declining net energy per unit of oil produced. The world’s economy is entering a contraction era, and its ability to buy oil/energy is declining.
The green line in the graph is an attempt to evaluate the price of oil relative to most people’s purchasing power. Many people have their regular and/or retirement investments in the stock market. The bear market that has been ongoing since the market top in 2007 has eroded their ability to buy oil as the purchasing power of their investments has declined. The green line is a ratio of oil prices divided by the S&P 500 stock index. A high reading of the green line indicates a high relative expense of oil prices vs. most people’s purchasing ability.
Also please see:
The Great Rollover Juggernaut
and
The Oil Crunch and The End of Growth
For reasons unknown and for which Yahoo refuses to disclose, this entire website has been banned/blacklisted from Yahoo’s search engine. Other websites have suffered a similar fate. If you are trying to find information via Google’s search engine vs. Yahoo’s search engine, you should understand that Yahoo’s results may not include the information that you are seeking.
Return to Durango Bill's Home page
Web page generated via KompoZer
The blue line is a ratio of the relative amount of futures contracts that have been sold short by large speculators. It is calculated by dividing the number of contracts sold short, by the sum obtained by adding both long and short contracts. For example, if the number of long positions is 60,000 and the number of short contracts is 40,000, then the short ratio is: 40,000 / (40,000 + 60,000) = 0.40. (Note: One contract equals 1,000 barrels of oil. The U.S. uses about 20 million barrels (20,000 contracts) per day.)
These futures positions can be accessed on-line after Friday's close at: http://www.cftc.gov/dea/futures/deanymesf.htm
where they are listed under Crude Oil - Non Commercial.
The orange line shows the price of the most distant oil futures contract. (Usually about 6 years in the future.) Earlier this decade, distant futures were priced below near term prices in the belief that oil prices would return to the $20 range. In recent years they have traded closer to the near term price.
While I am not in the business of providing investment advice, the following correlation appears to exist. When there is a large short position (The blue line is at relatively high levels), the short-term price of oil (red line) appears to be at relatively low levels and is usually followed by an increase in the price. Conversely, when traders' short position is relatively low (The blue line is at low levels), the short-term price of oil appears to be at relatively high levels, and is usually followed by a decline in price.
(Added 12/12/03) The era of easy, cheap oil appears to be drawing to a close. As chronic oil shortages become more widespread, the historic relationship between oil futures and short-term price moves may end as the price of oil begins a relentless march higher - especially as measured in U. S. dollars.
(Added 9/22/06) The recent sharp reaction in oil prices has carried prices well below the previous least squares quadratic trendline. It has been replaced by a running 2-year linear trendline which should be more representative.
(Added 11/7/08) It now appears that the peak in world oil production occurred last summer. The corresponding peak in oil prices represented the world’s maximum craving for (and ability to buy) oil. We are now on the downside of production - which is being exacerbated by declining net energy per unit of oil produced. The world’s economy is entering a contraction era, and its ability to buy oil/energy is declining.
The green line in the graph is an attempt to evaluate the price of oil relative to most people’s purchasing power. Many people have their regular and/or retirement investments in the stock market. The bear market that has been ongoing since the market top in 2007 has eroded their ability to buy oil as the purchasing power of their investments has declined. The green line is a ratio of oil prices divided by the S&P 500 stock index. A high reading of the green line indicates a high relative expense of oil prices vs. most people’s purchasing ability.
Also please see:
The Great Rollover Juggernaut
and
The Oil Crunch and The End of Growth
Note about
Google’s/Yahoo’s search engines
For reasons unknown and for which Yahoo refuses to disclose, this entire website has been banned/blacklisted from Yahoo’s search engine. Other websites have suffered a similar fate. If you are trying to find information via Google’s search engine vs. Yahoo’s search engine, you should understand that Yahoo’s results may not include the information that you are seeking.
Return to Durango Bill's Home page
Web page generated via KompoZer