While most commodities have struggled this year, oil has been resilient. Prices eased slightly since February on the back of weaker global growth and fewer geopolitical tensions, but with Brent crude trading at almost $110 a barrel this week, they remain relatively high by historical standards.
Can this surprising strength continue? Probably not, suggests Steve Briese, who writes the Bullish Review of Commodity Insiders, a market-timing newsletter. Briese points to recent trends in the Commodity Futures Trading Commission's weekly Commitment of Traders (COT) report, which summarises the net positions held by futures traders in America. Right now it shows commercial traders producers and users of oil have record net short positions, offset by record long positions held by speculators.
In essence, those traders whose businesses depend on reading oil prices correctly are signalling that they expect crude to fall, while the support is coming from financial market participants. Large commercial short positions certainly don't guarantee prices will fall in the near future, although previous records in April 2011 and February 2012 both preceded large sell-offs. But they indicate that if the market breaks, the decline could be rapid. That's because the speculators holding the opposite positions are dominated by trend-following funds, says Briese.
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Once the trend turns down, these kinds of traders will liquidate their long positions quickly and may well go short, putting further downward pressure on prices.
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