The latest Commitment of Traders (COT) report shows that large speculators have never been more bullish on crude oil and are holding an all-time high exposure to the ‘black gold’ (hopefully it won’t disappointment them like actual gold).
Related article: Has Gold Bottomed?
The Commodity Futures Trading Commission (CFTC) COT reports holdings data for various energy contracts and most of them show large speculators are record long.
What does that mean for oil and gas prices?
There are two key components to the short-term oil outlook. Both of them are illustrated in the chart below, which plots WTI crude oil prices against the COT large speculator data.
When large speculators were ‘all in’ in 2011 and 2012 oil prices corrected. Not immediately but inevitably.
The red trend line magnifies the potential impact of the current sentiment extreme. Oil prices are at technical crossroads as trade hovers around this support/resistance level.
ETFs that are affected by this sentiment/technical analysis combo include:
United States Oil Fund (NYSEArca: USO)
PowerShares DB Oil Fund (NYSEArca: DBO)
Ultra DJ-UBS Crude Oil ProShares (NYSEArca: UCO) - 2x leveraged long ETF
UltraShort DJ-UBS Crude Oil ProShares (NYSEArca: SCO) - 2x leveraged short ETF
Energy Select Sector SPDR (NYSEArca: XLE)
The trend line suggests that bullish and bearish forces are fighting a battle over short-term supremacy right around the 103 level.
As long as trade stays above trend line support, higher prices deserve the benefit of the doubt, but sentiment suggests that the we should see a notable correction eventually.
There’s one support level that absolutely must hold and a price target that – if reached – should be very damaging to the stock market.