Largest 4 WTI Crude Traders Position 11-17-2015

Here is a chart showing the largest 4 WTI crude oil traders net position using my metric vs price.  You can see they are much longer (bullish) than they have been since this time last year.  Just this week the largest traders added 10% to their long positions, about 27,000 contracts while paring back their short positions by about 7%, 12,600 contracts.

So if you want to bet crude oil prices will drop a lot more, this is what you are against.  And week by week they get more and more bullish.  You can see multiple times in the last year, where the biggest traders became bullish and price followed their lead up.

Largest 4 Crude Oil Traders Net Positions vs. Price

Here is a plot of the largest 4 WTI traders net positions using my proprietary metric.  This is what I call a leading indicator.  You can see a clear build up in long positions ahead of this springs big move up as well as a move neutral to short over the summer while price was range bound and then eventually crashing.  Then you can see another long build ahead of the late August spike and a continuous long build now.  You can determine on your own what is coming next.  I'm betting on an up move.  Long USO, crude and gasoline futures and UWTI.  I'm more confident in gasoline futures in the coming days since gasoline inventories were down this week while crude was up.  Not to mention all the crude in storage, tankers and the general US overproduction.

More on Crude Futures Positions

I decided to post this graph of absolute futures positions for the physical players--Producers, Merchants and Processors--and swap dealers that primarily provide hedging to the physical players that choose not to do that in the open futures market.  What jumped out at me was just how correlated the short position of the producers and swap dealers was to price.  Also it is quite noticeable when the swap dealers hold large long positions price rises.

The short term bearish issue is the large short position held by the physical players.  You can see the build in short positions whenever price nears $50.  One must also take into account that the plot uses Tuesday's price to match up with CFTC reporting requirements, while the peak and trough prices for the week aren't shown.

Another noticeable issue is the physical players boost their long positions significantly whenever there were opportunities in the low $40s.  This plot shows that most clearly for the late August/early September time period, but if you look at day to day futures prices you will see many other low $40s opportunities were available as well.  Indeed a clear support level can be drawn in the low $40s on a daily chart, the futures data simply supports what is seen in the price action.

Big Money is Super Bullish on Crude

As of Tuesday 11/4/2015 hedge funds, swap dealers and the biggest 4 traders were super bullish on oil.  As of today, 11/12/2015, crude is about 10% lower.  Since late August the big money has been buying crude heavily in the low $40s.  What do you think will happen after today?

Sure there is still a glut remaining, but the main driving force behind price is US production.  If it comes down price spikes.  Currently US production+Unaccounted--I feel this provides a truer picture of production than production alone-- has been maintaining around 9.6MM bbl/day.  That is after a fall to below 9.5MM bbl/day in July and September.  The late summer fall in production as WTI cratered indicates to me that producers got caught off guard by the early drop in price and didn't have much in place for hedges in August.  Indeed each time price reaches the $50 region you can see a spike in short positions by the physical and swap dealer groups.

If you look at the latest data you can see the swap dealers are far more bullish on crude than ever, as are the 4 biggest traders, and managed money is becoming more bullish as well.  I expect we will see a huge spike in long contracts from the physical group in the next two weeks as refiners and storage players binge on cheap oil.  Futures spreads are now over $1 so there is a lot of incentive to buy and store whatever is available.  But producers have little incentive to bring on new wells if they can't lock in a price near $50/bbl.

Decline in US Working Age Population vs Reported Jobs

total non farm long term 2015-11.xls

Some have downplayed while others have played up the affect the demographic shift in the US has had on the economy and jobs.  So I finally decided to do a comparison of the job situation vs the 19-64 year old working age population.

Using data provided by BLS and Census Bureau I created the above plot.  The top line is the working age population which has an obviously slowing growth rate.  The bottom lines show reported jobs using an annual monthly average and an expected jobs growth rate based on the 2007 employment peak when adjusting for the aging demographic.  You can see the estimated jobs growth line, the blue line, tails off matching the working age population line.  You can also see actual jobs are now almost inline with the expected jobs total based on growth of the working age population.

This chart both supports how incredibly slow the recovery has been, but also calls into question why the Fed has been waiting so long to raise interest rates off near zero using the very poor employment situation as an excuse, meanwhile stocks are soaring because of the cheap money used to inflate valuations with buy backs and margin buys.

Going forward I believe most will be shocked by how fast the Fed will be forced to raise interest rates as we are now nearing full employment which will drive up labor costs and drive inflation.  If things play out the way I see it in the oil patch, energy prices will soon be shooting up as well as US oil and gas production falls off as hedges expire this year.  Low energy prices may be the prime factor in holding down inflation this year, but could easily turn into the prime factor driving up inflation in 2016 and 2017.

I am short treasuries via sold call options on TLT and long TBT.

S&P 500 Historical View: Bubble or Not

Here is a chart of the S&P 500 that I use to calibrate myself to current market conditions.  I have similar charts for the DOW and NASDAQ Composite.  I use a log chart and then draw a price channel to get a view of where stock prices typically run historically, and what performance to expect when certain "trend" levels are hit, especially the top and bottom trend lines of the channel.

There are a lot of arguments about whether current conditions can be defined as a bubble.  What should be clear is that in the very long view the current price level is very high.  But one might say compared to past performance this century the price isn't that high compared to the last two peaks.  But if you look at the long term history showing many quite serious corrections when price is above the 4th trend line and up against the long term trend resistance line at the top, it shouldn't give one a lot of confidence the market has a lot of room to run.

Another way to think about it is through the lens of a long term billionaire investor, or a fund manager of billions.  That kind of money needs to be calculating the expected return on investment over a five, ten or even longer time period.  One of the methods would use the expectation of a regression to mean which would be the middle trend line, along with historical performance at various price "trend" price levels.  So do you think billionaires are approaching current market conditions with extreme confidence when in long term historical terms price is near the 100th percentile when the obvious bubbles are left out.  This is also why many analysts are predicting very low stock returns for the next 5-10 years because the probability of a return to mean is very high.  The current price level is at the mean expectation for 2022, 7 years away.

Some might argue my trend channel is too conservative.  I plotted a separate channel that enclosed the 2007 peak below the top channel line.  It actually puts current conditions around the 75th percentile rather than near the 100th percentile.  But I discount this case because of the very extreme correction of 2008.  This tells me that the price levels from 2004-2007 remained extreme by historical measures and 2007 was a very extreme peak, but not as bad as 1929/1930 or 2000/2001.  I see a return to historical norms/means in stock prices, albeit a very slow one.

Generally it seems we are at a point that few recognize when the markets are expensive.  I believe we are still suffering from a hangover from the dotcom bubble, where there is a continual comparison to the dotcom bubble which was a true 1929 type of event, while the more appropriate comparison for current conditions is 2007/2008, the 1987 flash crash or conditions in the 1960's and 1970's.

2015 US Employment trend almost identical to 2014

2014-21015 Employment Trend Comparison using non-seasonally adjusted data.  2014 data was normalized so 2014 and 2015 could be laid directly on top of each other to make any trend differences easier to see.

All year BLS has been reporting that employment gains have been slowing drastically.  Seasonally adjusted data clearly indicate this.  A recent MarketWatch article--link to follow--states "the US added an average of 206,000 jobs a month this year vs. a 15-year hig of 260,000 in 2014.  Well as you can easily see in the chart above using non-seasonally adjusted data, you can see 2015 trended almost exactly with 2014.

http://www.marketwatch.com/story/new-reports-suggest-october-jobs-blowout-is-an-outlier-2015-11-09

Being a math guy I also like to crunch the numbers.  Using average monthly employment 2012 & 2013 showed a 1.7% gain, about 190k/month, 2014 showed a 1.9% gain, about 220k/month.  But if we compare the average monthly employment for the latest 12 month period vs the previous, the data shows a 2.1% gain, about 250k/month.  Comparing monthly using a year over year (YoY) comparison the same trend is seen with monthly gains around 240k-260k/month for the last year.  The YoY monthly comparisons shows a slight downtrend from 2.4% early in the year to 1.94% in the latest month.

The plots of the raw BLS data and mathematical comparison just does not support the claim that employment gains have slowed drastically in 2015 compared to 2014.

I hope everyone is expecting a big job gains number for October.

I hope everyone is expecting a big job gains number for October.  BLS has some making up to do.  If you look at the above graph you will see multiple years of raw, non-seasonally adjusted employment data plotted.  This data was downloaded from the BLS website.

Just looking at it you can see not much has changed in terms of the employment trend compared to 2014.   Yet this year as rate hikes seemed imminent because employment was strengthening suddenly the seasonally adjusted jobs gains reported by BLS nosedived.  The 2014 average reported seasonally adjusted gain was about 240k/month, while 288k/month was reported from Sept 2014 to Feb 2015.  But then suddenly March 2015 was reported at 126k, May, June and July rebounded but still all but June were below 230k.  Then August and September were 173k and 142k respectively. Since March seasonally adjusted gains have averaged just 197k/month while the comparable period in 2014 was 242k.

If you look at YoY calculations on the raw data, every month since June 2014 has been showing a gain of 1.94%-2.39% which is about 240k-260k/month.  If you average employment for the last 12 months and compare to the same period a year earlier you come up with job gains averaging 251k/month for 2015 plus the last 3 months of 2014.

Yes if looks like monthly job gains have slowed from a peak of around 260k/month to about 230k/month now.  However this slowdown has been drastically overstated by the BLS seasonally adjusted data which is showing gains well below 200k/month lately.  It appears the BLS seasonal adjusted data is 20%+ low for the year.

Another point of interest is that in 2014 BLS seasonally adjusted reports showed average monthly gains were about 240k/month while YoY was around 220k regardless if you looked at the months individually or the year as a whole.  The BLS seasonal adjustment was about 10% high on average and 20%+ high in many months.  While in 2015 suddenly the seasonal adjusted reading is on average about 20% low, and misses low by 30% in many months.

I'm not saying any of the new jobs created or good or high paying--the data clearly indicates otherwise--, just that it seems the quantity of jobs is understated by a wide margin this year.

The December crude oil contract ended Tuesday 10-27 around $43.39/bbl.  This weeks CFTC Commitment of Traders Report (COT) for 10-27 indicates that swap dealers and the largest traders continue to get more bullish, but managed money has gotten significantly less bullish as have physical traders and the non-reportable group.  I believe this reflects physical traders and producers selling above $47, the large amount of oil in storage--especially the recent surge in tanker storage-and most importantly US production that has leveled off.

Still total contract numbers show long positions increasing for every group even as short positions increase in some groups, negating any growth in long positions in those groups.

As you can see my indicator for swap dealers is now much more bullish than it was for the March and August surges.  Indeed we saw a Wednesday surge in price when the EIA report indicated that crude+refined inventory fell 3.5MM bbl.  This was mostly due to high demand and a drop in imports.  The biggest drop in imports was from Mexico.  Imports from Canada and Saudi Arabia were very strong.  I believe imports from both Canada and Saudi Arabia, especially Saudi Arabia, can move significantly higher.

All indicators show a strong cap remaining on crude oil prices, however pressure continues to build for a strong upside move.  My belief is last weeks bullish EIA inventory data is a one off event for now, this week should show a build.  Market reaction after the Genscape inventory reports this week has been generally bearish.

I am primarily short crude.  Short CLZ5, own DWTI and have sold both puts and calls on USO.  I'm medium and long term bullish on crude, but short term bearish.

Looking to rebuy UWTI in the $8.25-$9 range, buy CLZ5 in the $42.50-$43 range and sell puts on USO when it hits $13.75-$14.