Late-month crude prices whipsawed

Nov. 1, 2010

by Sam Fletcher, Senior Writer

October started with promise as the November crude contract climbed to a near 8-week high of $81.58/bbl Oct. 1 on the New York Mercantile Exchange when positive consumer spending data diminished fear of a double-dip recession. But by mid-month, fluctuations in the value of the US dollar and in economic indicators were whipsawing oil prices.

"Down $3/bbl, up $3/bbl, down $3/bbl," observed Olivier Jakob at Petromatrix, Zug, Switzerland during the biggest price swings as crude continued to trade within a relative small range but often covering the entire range in some sessions. "It can do that for a while, but there will be at one stage a volatile breakout of the recent range," he said.

On Oct. 15, November crude fell $1.44 to a near 2-week low of $81.25/bbl but after the weekend rebounded to $83.08/bbl Oct. 18 for the biggest 1-day increase for the month. It then dropped to $79.49/bbl Oct. 19 in the biggest 1-day decrease in both percentage and amount since February but bounced back to expire at $81.77/bbl on Oct. 20. The new front-month December crude contract lost $1.98 to $80.56/bbl Oct. 21 on a higher dollar and lackluster employment. On Oct. 22, it recovered to $81.69/bbl.

The overall influence of the US dollar across asset classes was evident Oct. 19-20, but on Oct. 21 the trading pattern changed, Jakob noted.

"US equities benefited from their own strength as index traders were focused on having the Dow Jones Industrial Average and the Standard & Poor's 500 index penetrate the resistance of recent highs. The euro was not successful in sustaining a break of the resistance…but the reversal in the dollar was not that huge and nothing in comparison to the volatility seen [earlier]," he said.

Jakob reported "a temporary breakdown in the intraday correlation of oil to the dollar" during the Oct. 21 session, followed by a drop in trading volume for West Texas Intermediate—"not to the lowest level of the year but very close to it."

Large speculators reduce length

Jakob said Oct. 24, "The aggregate net length of large speculators in [WTI] futures (on the IntercontinentalExchange Inc. in London and NYMEX) was reduced by about 19,900 contracts. The large speculators increased their short exposure (by about 13,500 contracts) but they also reduced length (about 6,500 contracts)."

The number of large traders in the WTI physical market "decreased significantly on the long side (down by 10 traders) while on the short side there was an increase (8 new large traders)," Jakob said, adding, "This was the first in 8 weeks there was a reduction in the number of large traders on the speculative long side."

Jakob said, "Open Interest has also been drifting lower in crude oil but mainly in WTI due to expiry of the November positions that were not rolled into December. There was no significant increase of crude oil open interest at the back of the curve."

At the back of the price curve in distillates, most of the open interest is in ICE gas oil rather than in NYMEX heating oil. This trend likely will continue "due to termination of the current NYMEX heating oil contract in January 2013 (to be replaced with a low-sulfur contract)," Jakob said.

He said, "During 2011, US consumers that want to hedge on a 2-year horizon will probably need to move to the ICE gas oil contract given that liquidity at the back of the NYMEX heating oil contract should erode. The commodity indices will in the coming days also announce their weights for 2011, and for those indices that invest both in NYMEX heating oil and in ICE gas oil we would expect a rebalancing at the start of 2011 towards ICE gas oil."

Termination of the current NYMEX heating oil contract could be in 2012 "a concern for commodity indices that invest solely in NYMEX heating oil," said Jakob.

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