Why Did Hedge Funds’ Bullish Position in US Crude Oil Fall?
Hedge funds and US elections
On November 4, 2016, the CFTC (U.S. Commodity Futures Trading Commission) released its weekly “Commitments of Traders” report. It reported that hedge funds decreased their net long positions in WTI (West Texas Intermediate) crude oil futures and options contracts for the second time in the last six weeks in the week ending November 1, 2016. Hedge funds are cautious ahead of US election because Donald Trump’s energy policies might increase the drilling activity if he wins the election. Read How Could Donald Trump Impact the US Energy Market? and How Could Hillary Clinton Impact the US Energy Market? to learn more.
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The net long positions in US crude oil futures and options fell by 34,063 contracts to 234,126 contracts for the week ending November 1, 2016—compared to the previous week. The net long positions fell 12% week-over-week. They peaked at 291,453 contracts for the week ending October 18, 2016—the highest level since May 12, 2015.
Crude oil prices fell 3.9% in the last week—compared to the previous week. For more on crude oil prices, read Part 1 and Part 3 of this series. Hedge funds’ bullish positions also fell ahead of OPEC’s (Organization of the Petroleum Exporting Countries) meeting.
Commercial and noncommercial traders
The CFTC divides traders into two categories—commercial and noncommercial. Hedge funds are noncommercial traders, while oil producers and consumers are commercial traders. Commercial traders use the futures and options markets for hedging activity to offset crude oil price volatility.
Open interest for WTI crude oil futures and options contracts rose for the fourth time in the last five weeks in the week ending November 1, 2016. It rose by 37,370 to 2,654,648 contracts between October 25 and November 1, 2016. The open interest for WTI crude oil futures peaked at 2,768,466 contracts in the week ending October 11, 2016.
Impact on energy stocks and ETFs
Hedge funds’ bullishness or bearishness can impact crude oil prices, which can impact the oil and gas producers’ revenues such as Comstock Resources (CRK), SM Energy (SM), Range Resources (RRC), Marathon Oil (MRO), and W&T Offshore (WTI).
Crude oil prices also impact ETFs such as the VelocityShares 3x Inverse Crude Oil ETN (DWTI), the iShares US Oil Equipment & Services (IEZ), the iShares US Energy (IYE), the Guggenheim S&P 500 Equal Weight Energy ETF (RYE), the Direxion Daily Energy Bear 3x ETF (ERY), the SPDR S&P Oil & Gas Equipment & Services ETF (XES), the ProShares Ultra Bloomberg Crude Oil (UCO), and the Vanguard Energy ETF (VDE).
In the last part of this series, we’ll take a look at some crude oil price forecasts.