COT Data Positive on Crude, Negative on Live Cattle

Andy Waldock of Commodity & Derivative Advisors, shows current trends in Commercial Interest from the CFTC Commitments of Traders (COT) report.

The petroleum markets have fallen more than 40% since early October. The higher crude climbed over the last year, the more it expanded drillers’ margins. The Baker Hughes U.S. Rig Count has risen by 153 active rigs over the last year, and now stands at 1,083. The surge is a direct result of being able to hedge future production at a profitable margin. Drillers needed this rally to get back to work, and increased production efficiencies learned from the last bust brought new production online in record fashion, this February. Commercial traders (drillers) set a net short record of more than 760,000 contracts.

The tide has turned, and the market’s decline is projecting a shift in profit margins back in favor of the refiners. The refiners were remarkably patient during the market’s rally, but their purchases have accelerated, bringing the net commercial position to its most bullish position since the July 2017 low of $42.27 per barrel in the September 2017 contract.

This market is set up for a reversal higher because the refiners are buying in massive quantities and the drillers have sold forward enough production at higher prices to sit on their hands and wait for prices to rise. This leaves makes the large speculative short position exposed to a potentially thin market moving higher and fueled by stop-loss purchases and profit-taking as the market seeks a new equilibrium.

Live Cattle

Live cattle has been marching higher since early April. There are a couple of factors that suggest the farmers may be selling more aggressively than the packers are buying through the end of the month. First, as noted on the worksheet (see table below), commercial momentum is negative over the last four weeks as well as overall. Live cattle prices have continued to climb, attracting more short hedging. More importantly, the short hedging pace has accelerated as we’ve neared overhead resistance.

The added producer selling is also part of a more significant pattern playing out on an annual basis. We eat less beef in January than we do in December. This social trend has also accelerated. Recent historical trends show April live cattle rallying from Jan. 1 through mid-February before an about-face decline of roughly 14% by the April contract’s first notice date. We see the commercial traders preparing for the same setup this year. Deeper digging shows an expected decline similar to last year’s may be a bit greedy. A rational approach sees the commercial traders defend the $128-130 resistance and force the market lower by Feb. 1.