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Open Interest Analyst

Open Interest Analyst

Garry SternGarry is the founder of openinterestanalyst.com (OIA), a website dedicated to analysing the interaction between price, volume, and open interest (P-V-OI). After consistently applying…

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Weekend Energy Wrap

Crude oil:

For the week, June crude oil lost $1.40. The COT report showed that managed money liquidated 7,080 contracts of their long positions and added 2,085 contracts to their short positions. Commercial interests added 19,674 contracts to their long positions and also added 12,887 contracts to their short positions. As of the latest report, managed money is long by a ratio of 5.68:1, which is down from the previous week of 6.23:1, but the same as the ratio of 2 weeks ago of 5.66:1.

Interestingly, the current long to short ratio is nearly the same as it was 2 weeks ago. Two weeks ago, on March 26 (COT tabulation date) June crude oil closed at $96.45, which is $2.00 above the close on April 9. In order to provide some historical perspective, the long to short ratio was 3.50:1 when crude oil made its low of $90.23 in early March 2013 and 3.44:1 on March 12. Taking a look farther back to late November-to mid December 2012, the long to short ratio got as low as 1.86:1 on December 11 2012. In this time frame, crude oil traded in a range between $88.00 and 91.00. Based upon the current set up in WTI, it certainly appears that much more liquidation is ahead, especially by managed money. The long-term charts show that the 50 week moving average for the June contract is $92.84 and the 200 week is 91.72. It appears to be a matter of time before the 50 week moving average crosses below the 200 week moving average.

The weekly chart reveals 4 distinct peaks in WTI going back over a year. The first occurred during the week of February 27, 2012 at $110.55, the second during the week of September 10, 2012 at $100.42.

The third occurred during the week of January 28, 2013 at $98.24. And the fourth and most recent peak occurred on April 1 at $97.80.

WTI is oversold relative to its 50 day moving average of $94.16 on the WTI continuation chart. A decent size rally should be expected to the $93.50 level. On April 5, 2013, Open Interest Analyst announced that May WTI crude oil generated a short and intermediate term sell signal.

As we stated in the April 5 report: "Based upon past history, we expect WTI to have a bounce after the generation of a short and intermediate term sell signal." Crude did in fact have a bounce up to the $94.70 level, and then reversed to close at the lowest level ($91.29) since March 6 ($90.90). Wait for a rally before implementing bearish positions.

Heating oil:

For the week, June heating oil lost 3.78 cents. The COT report showed that managed money liquidated 1,284 contracts of their long positions and also liquidated 1,753 of their short positions. Commercial interests added 13,897 contracts to their long positions and also added 8,913 contracts to their short positions. As of the latest report, managed money is long heating oil by a ratio of 1.15:1, which is up slightly from the previous week of 1.13:1, but up dramatically from the ratio of 2 weeks ago when managed money was short by a ratio of 1.02:1.

Gasoline:

For the week, June gasoline lost 4.94 cents and ethanol was unchanged for the week. The COT report showed that managed money liquidated 11,092 contracts of their long positions and added 2,276 contracts to their short positions. Commercial interests added 1,451 contracts to their long positions and liquidated 16,325 contracts of their short positions. As of the latest report, managed money is long gasoline by a ratio of 6.80:1, which is down substantially from the previous week of 9.85:1, and the ratio of 2 weeks ago of 10.87:1.

We examined our records on the COT reports in previous periods when gasoline traded at or below the current price. We expected to find long to short ratios that were lower than the current reading of 6.80:1, but we found the opposite. The last time that gasoline traded at current levels was during December 2012, and the table below shows the closing price on the date of each COT report and the long to short ratio. Additionally, we examined the long to short ratios when gasoline prices were lower than December 2012 during late October and early November 2012.

Date of COT Report     Closing Price        Long to Ratio
December 4, 2012         $2.8214                 10.94:1
December 11    "           $2.7535                  7.30:1
December 18   "            $2.7920                  7.50:1
December 24   "            $2.8303                  8.24:1
December 31    "           $2.8622                  8.47:1
April 9, 2013                  $2.9387                 6.80:1

Additionally, we examined the long to short ratios when gasoline prices traded lower than December 2012.

October 23, 2012           $2.7285                12.09:1
October 30     "              $2.7433                  9.77:1
November 6    "              $2.8254                  9.75:1

We wanted to get to the root of the low COT ratio on April 9, and thought that perhaps the participation rate was lower on April 9 than it had been during weeks when  the long to short ratio was at elevated levels. What we found, was that the participation rate on April 9 was very close to the participation rates when the long to short ratio was at much higher levels. As the table below reveals, there is no pattern of increased participation (long + shorts) by managed money that translated into high long to short ratios. The October 23 data set is especially revealing because it had the highest long to short ratio, but the lowest closing price of any other week. The total number of longs + shorts of managed money for October 23 is only 3440 contracts above the April 9 number, yet the long to short ratio is approximately 75% higher for October 23 than April 9.

Date of COT report     Total longs + shorts/ managed money   Total open interest     Long to Short Ratio
October 23, 2012                 89,064                                             280,927                    12.09:1
November 6   "                     83,750                                             265,750                      9.75:1
December 4    "                   95,187                                              273,735                    10.94:1
December 31   "                   85,212                                             281,699                      8.47:1
April 9, 2013                        85,624                                             314,960                      6.80:1

The extraordinarily low long to short ratio  in gasoline may represent a mindset of professional money managers who have become negative on commodities in general, however this does not appear to be the case with crude oil. As we pointed out in the April 7 Weekend Wrap: "Last year at this time, gasoline went from a high on April 16, 2012 of $3.23 down to a low of $2.48 on June 21, 2012. It then rebounded to $3.12 on August 31, 2012." Gasoline is massively oversold relative to its 50 day moving average of $3.07 on the June gasoline chart. A rally to the $2.97 area would relieve the oversold condition. Gasoline remains on a short and intermediate term sell signal. Stand aside.

Natural gas:

For the week, May natural gas advanced 9.7 cents. The COT report showed that managed money added 13,048 contracts to their long positions and also added 532 contracts to their short positions.

Commercial interests added 7,622 contracts to their long positions and also added 12,813 contracts to their short positions. As of the latest report, managed money is long natural gas by a ratio of 1.34:1, which is up slightly from the previous week of 1.30:1 and the ratio of 2 weeks ago of 1.24:1.

The stats that comprise the latest COT report are vastly different to those when natural gas was at the $4.20 level in late October 2011.

The current COT report shows a much higher level of participation than does the COT report of October 25, 2011 and November 1, 2011.

Remarkably, at the top of the move in late October of 2011, managed money was short natural gas by a ratio of 2 to 1. The high was made on October 28, 2012 at $4.21. On April 9, May natural gas closed at $4.017.

Date of COT report     Total longs + shorts/ managed money     Total open interest    Short to Long Ratio
October 25, 2011                361,952                                             977,327                     2.01:1
November 1, 2011               354,531                                             960,199                     2.06:1
April 9, 2013                      593,315                                           1,517,970            (Long)1.34:1

Natural gas reached its highest level since late October 2011, and the market has moved steadily higher. It is surprising that the long to short ratio is as low as it is considering natural gas is by far the best performer on a year-to-date basis. Despite this, the long to short ratio is approximately 80% less than gasoline, and 76% less than crude oil. Natural gas should find support at the $4.02 level, and the market is overdue for a pullback. On March 1, 2013, Open Interest Analyst announced that natural gas generated a short-term buy signal, and an intermediate term buy signal on March 8.

From the March 1 report:

"Natural gas remains on an intermediate term sell signal, and clients wanting to get long should use setbacks as buying opportunities. A more conservative way of trading the natural gas market is to write out of the money puts. During past 3 days, each high has been higher, but the market made a low of $3.408 on Monday, which was the lowest price since $3.395 made on February 28. Managed money is significantly short natural gas, which should provide fuel for an upside move."

COT report         April 3-April 9     Year to Date
May ethanol        +5.93%               +8.90%
May natural gas  +1.79%              +23.05%
May gasoline       -2.83%                 -2.09%
May WTI             -2.83%                 -2.37%
Brent crude         -3.67%                 -4.63%
May heating oil    -3.76%                 -4.65%

By. Gary Stern




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