There is a clear disconnect between the economy that the news agencies and politicians keep telling us about and the one that commercial traders in the crude oil market are forecasting. While the unemployment numbers harken back to pre-crash days and the equity markets are above their pre-crash highs, commercial crude oil producers’ selling strongly suggests that they believe the economy is weakening. Therefore, they feel any forward sales they can make above $95 per barrel will be beneficial to their bottom line going forward.
Commercial traders accurately called the tops in August and more recently, late December. You can see on the chart that their bias became decidedly bearish in late October. They have been net sellers in 12 out of the last 14 weeks. This selling pressure effectively capped the last rally at $100.79 per barrel in the March contract on December 27th and the current setup looks much the same. Markets being what they are, I expect we may breach the December high before turning lower.
Whether we make new highs or not, we will wait for the market to head south before throwing our hand in on the short side while using the commercial traders’ selling as our backstop. The weeks of cold weather have kept the public indoors. This will lead to softer economic numbers over the next month and a build in crude supplies as personal vehicles have stayed home and commercial vehicles have had less merchandise to restock. I believe this is part of the economic picture that commercial crude oil producers are anticipating.
