According to recent news headlines, this past weekend’s increased Middle East violence did not result in a significant number of casualties, leading to a selloff in WTI crude oil prices.
Despite this, the market still appears technically bullish, although it has been struggling to attract new buying interest from investors.
Fundamentally, the WTI crude oil market remains bullish, as evidenced by the backwardation in the market’s forward curve.
In recent discussions, I have applied my Market Rules to the gold market, which continues to attract buying interest despite reaching new all-time highs almost every week. Additionally, the corn market has been garnering attention from both commercial and non-commercial traders.
However, what about the third King of Commodities, King Crude Oil? As you may recall, this situation began with the spot-month WTI crude oil contract experiencing a significant drop of $4.
On Monday, crude oil prices plummeted by $4.40 (6.1%), closing at 86. The market’s reaction was influenced by headlines that were perhaps a reflection of the world we’ve created, with the general consensus being that the missile attack by Israel on Iran did not result in sufficient casualties or destruction of crude oil supplies. However, there might be more to this story.
Let’s delve into the market structure to understand the ‘what’ behind market activity, rather than speculating on the ‘why’ (Newsom’s Market Rule #5). According to Newton’s First Law of Motion applied to markets, the investment side sets the trend. Analyzing crude oil’s continuous weekly chart, we observe that the spot-month contract (CLZ24) experienced a bullish spike reversal the week of September 9, indicating that the intermediate-term trend had turned upward.In the financial market, the term ‘Watson’ refers to the algorithm-driven investment component. Recent observations suggest that Watson may have re-entered the market as a buyer. To verify this, we tracked the weekly CFTC Commitments of Traders report, which focuses on legacy futures. As of September 10th, funds held a net-long futures position of 140,014 contracts. This position expanded to 190,637 contracts by October 8th, marking an increase of approximately 50,600 contracts.
Upon closer examination, it is revealed that the funds increased their long futures position by 12,231 contracts and decreased their short futures position by 38,392 contracts during this period. As previously discussed, an increase in the net-long futures position that is primarily driven by short-covering is less bullish compared to an increase resulting from the addition of new long positions.
This brings up the next question: Will the market witness increased buying interest? Newsom’s Market Rule #6 states that “Fundamentals win in the end”. We know WTI crude oil fundamentals remain bullish. You may ask, how do we “know” this when markets are filled with contradictory government numbers and media stories? The answer is by ignoring these two items and concentrating on the market’s forward curve. Looking at the chart for WTI, it shows that the market is mostly backwardated (inverted for those not from New York) from the December 2024 contract through December 2029. This implies that nearby futures contracts are priced higher than deferred issues, reflecting commercial interests pushing the nearby contract in relation to deferred issues to source supplies to meet demand[i]. So, if our analysis of real market fundamentals indicates a bullish long-term outlook, then why isn’t Watson buying? Recall that back in late September, I wrote about which commodity markets could attract increased investment buying interest in the last quarter of 2024. WTI crude oil had solid potential based on its forward curve.
A month has passed, and things haven’t turned out as expected. However, much could still occur. Last but not least, the US presidential election is coming up next week. My views on what’s happening are well-known, so I won’t elaborate further in this piece. In terms of the crude oil market, the key takeaway is a recent story (from MarketWatch, if I recall) about the petroleum industry pushing hard for political change. Various reasons were discussed, except one: going back to the days when ‘hardship’ waivers were handed out like Halloween candy to US refiners. We don’t know how next week will unfold, although most people claim they do. We also don’t know exactly how the crude oil market could develop. The market is currently in a similar position as it was a month ago, on the verge of becoming bullish due to both commercial and noncommercial buying.
In the complex world of finance, there exists a spectrum of perspectives, much like a kaleidoscope of butterflies fluttering, leaving the door open to unexpected twists and turns.[i]
This topic brings to mind a particular encounter I had with the president of the company I was employed by. He was an economist, among other roles, and was convinced that my views on futures spreads and forward curves were incorrect.[ii] His belief, shared by others in the economics community, was that lower priced deferred contracts signified a bearish supply and demand outlook, as the market was signaling lower prices over time. I had the unique pleasure of sitting across from him and confidently stating, ‘You are wrong, and here’s why.’ Let’s just say my insights have been so controversial that television interviews have been cancelled once my notes on markets and the election were shared.
