WTI NSL and structure are lagging – for now
Looking at the price action in January, it is obvious that investors’ mood has improved considerably. Apart from the sharp sell-off in the first two trading sessions of the year, the oil complex has been trending higher. For example, the front-month CME Group WTI contract went on a winning streak that lasted eight days and has recovered all the ground it had lost at the very beginning of the month. Invaluable support came from moderating inflationary readings in the major economic centers of the world, the lifting of Chinese Covid-19 restrictions, and the expectations that after the introduction of the EU ban on Russian product sales on February 5 the distillate market will become even tighter than it currently is.
Bullish enough? Well, not unambiguously. There are two rather significant indicators that do not share the enthusiasm displayed in the recent past and they go hand in hand. The first one is the positions of money managers in the U.S. benchmark crude oil contract. The latest CFTC report puts net speculative length (NSL) in WTI at 143,500 contracts for the week ending January 10. It is the lowest value since November 2019. The depressed enthusiasm of money managers is coupled with the contango structure of WTI. The relationship between the two, as shown in the chart, is strong – the deeper the contango the lower the NSL. Given the sanguine fundamental outlook there is nothing wrong with having some length on, but a bull market could arrive when a considerable increase in NSL is coupled with strengthening of the WTI structure. It is entirely reasonable to conclude that a profound change in the crude oil curves could attract a significant amount of additional speculative money, driving prices meaningfully higher. After all, backwardation offers extra profit on long positions in the form of monthly rollovers.
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