Sometimes markets are driven by trend-traders following hard supply and demand facts, sometimes they are driven by speculative buying in anticipation of a change in the fundamentals. The three major energy markets – crude oil, gasoline and natural gas – have demonstrated both sides of the equation this summer.
Currently the energy markets are being driven by stories of what could happen rather than what is happening. Every week, it seems we are told about excessive supply, excessive production and low demand, yet the three main markets remain firm.
Every week, we are reminded that there is a supply glut in crude oil and that the U.S. rig count is rising. We are told that gasoline inventories are relatively high and that automobile owners are driving less. We are also reminded of the near storage capacity of natural gas supply and the relentless production.
But that’s the way summer markets tend to trade. Vacations and other activities tend to lead to lower than average volume. Money managers following the main trend seem to be on autopilot, working the trade when it’s going in the direction of the main supply/demand fundamentals then taking profits or squaring positions when conditions change due to rumor and innuendo.
For example, when crude oil started to trend lower on bearish fundamentals, the hedge funds and money managers heavily shorted the market, creating a record short-position. They were simply following the bearish…