Oil prices have declined for the better part of the past five months. The unexpected contraction in the Japanese economy in Q3 underscores that the strong supply growth is taking place amid weakening demand. OPEC's meeting is still ten days away. Remember that OPEC oil is mostly the heavy sour variety, while the US shale product is mostly light sweet. This means that even if OPEC can agree and implement a cut in output, it may not have as much impact on the US benchmark WTI as it may appear.
Recently an OPEC official opined that speculation was the main reason oil prices have slumped. The CFTC published the latest Commitment of Traders report before the weekend. It covers the week through last November 11. Speculators, or what the CFTC refers to as non-commercials, meaning that they do not have an underlying business interest, are net long 276,000 NYMEX crude oil futures contracts. This represents an 8k contract increase over the course of the reporting period.
As this Great Graphic, created on Bloomberg illustrates, on a net basis, speculators had been accumulating a substantial long oil position. Although this graph covers the past five year, the peak in late-June represents a record high. Since the peak, the net long position has been cut by about 40%, but the point is that the speculative position is still long and from a historical perspective, it is still quite a substantial net long position.
The net position is the sum of gross longs and gross short positions. It is true that the gross short position has increased since the multi-year low was set in mid-June near 88,000 contacts. It has essentially doubled in the past five months. However, at 165.3k contracts, the gross short position is just above last year's highs, but below the highs from earlier in the decade as the chart illustrates.
At the same time, gross longs have fallen from record levels, but remain significant. From the late-June high of almost 550k contracts, the gross long position fell to 421k contracts at the end of September, but has since increased to 442k. The gross long position has risen in eight of the past ten weeks.
In terms of economic impact, the drop in oil prices presents a transfer of wealth from oil producers to oil consumers. The IMF estimates that a $10 drop in the price of oil boosts world growth by around 0.2%. The price of Brent oil, the international benchmark, has fallen about $35 since June. This could add about 0.70% to world growth. In the US, the savings on energy is worth $500-$600 to the average American household.
Given that speculative players are still quite long oil, a capitulation trade, perhaps encouraged by the lack of a credible agreement by OPEC, could see even lower prices. A further drop in oil prices may offer world economy its best near-term hope to boost aggregate demand.