Open Interest Contracts Fall: Will Crude Oil Prices Bottom Out?



CFTC report 

The CFTC (U.S. Commodity Futures Trading Commission) released its weekly Commitment of Traders report on February 26, 2016. The government agency reported that open interest for WTI (West Texas Intermediate) crude oil contracts has fallen by 17% since mid-February 2016 to its lowest level in 2016. Open interest was at 1,776,696 contracts for the week ending February 23, 2016. Despite the recent drop, open interest is close to historic highs.

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Commercial and noncommercial traders

Hedge funds raised their bullish positions in crude oil futures and options by 16% for the week ending February 23, 2016, compared with the previous week. The total bullish positions held by hedge funds and speculators came in at 205,856 for the same period. The long positions rose by 46,869 contracts for the first time in the last four weeks. This suggests that hedge funds are bullish about crude oil prices. They suggest that oil prices might bottom out in the short term. However, we’re still seeing record production from Russia to Saudi Arabia.

The CFTC divides traders into two categories: commercial and noncommercial traders. Hedge funds and speculators are noncommercial traders. Oil producers are commercial traders. Commercial traders use the futures and options markets for hedging activity to offset lower crude oil prices.

Commercial crude oil traders increased their short positions by 44,234 to 213,229 contracts for the week ending February 23, 2016. The current low crude oil prices negatively affect oil producers like Hess (HES), Chevron (CVX), and Noble Energy (NBL). However, low crude oil prices benefit oil refiners like Western Refining (WNR), Alon USA Partners (ALDW), Valero Energy Corporation (VLO), Tesoro (TSO), and Northern Tier Energy (NTI).

The volatility in oil prices impacts oil and gas ETFs and ETNs such as the iShares Global Energy ETF (IXC), the VelocityShares 3x Inverse Crude Oil ETN (DWTI), the Vanguard Energy ETF (VDE), and the iShares U.S. Energy ETF (IYE).

In the next part of this series, we’ll look at the latest forecasts for crude oil prices.


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