Crude Oil's Seasonal Linkage To Speculative Positioning In Charts

The continued rangebound nature of both the crude oils is currently creating some frustration among large speculative investors such as hedge funds. Both oils have been trading fairly stable over the past couple of months with an out-performing WTI crude narrowing the discount to Brent. Hedge funds meanwhile have continued to increase their net-long position in the futures market on the assumption that this was the road of least resistance. That was due to an expected pick-up in demand over the summer combined with the ever present if not yet realised risk of a geopolitical event in the Middle East.

Seasonally, we have witnessed a July to August rally on both crude oils over the past year following a weak second quarter. The following charts indicate price developments and shows that speculative investors may have jumped a bit too soon considering the headwind currently being created by the risk of a Chinese hard landing and the early end of US quantitative easing. As long as the lower end of the current ranges are not breached, the market should not probably fear this elevated involvement but a break could trigger a move greater than is warranted.

The speculative data below was collected during the week ending June 18 prior to the sell-off that occurred last week. The net-long positions would therefore have been reduced although to what extent, we will not know for sure until this Friday when the US Commodity Futures Trading Commission releases data for the week ending today, June 25.

The net-long position in Brent crude is getting close to the record seen earlier this year and well above previous spikes which occurred during the Libyan war in 2011 and when sanctions against Iran were introduced in 2012.

But over the same period, the open interest in Brent crude has continued to rise as it has overtaken WTI crude's role as a global benchmark. On that basis it is worth keeping an eye on the speculative position as a percentage of open interest. It shows that anything much above 10 percent has triggered sharp corrections during the previous couple of years and should be watched carefully.

WTI crude oil has been very stable so far this year while Brent crude has drifted lower narrowing the spread.

Hedge funds have nevertheless been increasing their net-long exposure not only on an expected demand pick-up but also perhaps even more so on some long positions being initiated against Brent to take advantage of the change in relative value between the two.

As a percentage of open interest, the net-long position is at its second highest level over the past couple of years despite the lack of price performance. Again, a break below recent lows or a sudden change in sentiment towards further spread contraction to Brent crude could trigger a bout of long liquidation.