Nymex WTI is back at a premium across the entire curve as of Monday.
What does that mean? In the first instance, it implies the Cushing issue has been resolved and that holders of “floating storage” are likely going to be inclined to close out those rather expensive positions.
Whether it means oil is set for a fresh bull run is debatable however.
What is worth noting is the fact that new market dynamics are certainly at play. For one, last week saw sizable liquidations and general shorting of WTI contracts by large speculators. According to CFTC data the most active players consequently were commercial players buying up the length being liquidated.
As Olivier Jakob at Petromatrix notes:
The addition of length by the Commercials is making for a switch in the net positions by Category. The Large Speculators have moved during the CFTC week from being net long to being net short and the Commercials have done the opposite.
Meanwhile, JBC Energy notes how fresh forces are feeding into the products arena too (our emphasis):
Last week was the first time since summer 2007 that RBOB regained its premium over Heating Oil. This is the result of a strongly deteriorating middle distillate market (also observable in other regions) and the continuous strengthening of gasoline. The latter is also supported by the first positive news regarding US demand stemming from the EIA, which reported a 2.2% increase year-on-year (4-week average) in its latest data release.
Be all that as it may, the contango – while weakened – is still holding tight at the front end of the WTI curve. This is likely to continue at least while the main WTI-invested funds roll their front-month positions this week. At the current depth of contango funds are losing about $2,000 per contract rolled (1 contract is equal to 1,000 barrels of WTI). In the case of the United States Oil Fund ETF, which began rolling on Friday, the losses are best illustrated by the fund’s latest update of pending trades — selling at $45.52 and buying at $47.72.
Olivier Jakob highlights the USO sold 1,202 contracts outright to maintain an equilibrium. While this coincides with a general reduction in the ETF’s WTI position – about 20,000 contracts less than its peak position around February 24th, and some 29,200,000 units less than were outstanding at the time, Jakob is unsure whether the reduction trend will continue. As he notes those holding USO appear to be by far a sophisticated financial clientele, invested even despite of the negative roll situation – be it potentially on behalf of retail clients (our emphasis):
There might be a few retail investors in the USO but our analysis of the “13F” SEC Forms reads like a who’s who of the financial industry. At the end of 2007, when the positions were only of 5’000 WTI contracts the USO holdings were concentrated in the hands of Bank Of America, Morgan Stanley and Goldman Sachs but by the end of 2008 (58’000 WTI contracts) the list has grown exponentially to include most of the prominent Investment Banks and Asset Managers.
As the number of asset managers holding USO shares has significantly increased (to the point where it is not anymore a question of who is on the list but rather of who is not) there is not anymore any significant concentration with one or two companies and we could not spot any share holder taken in isolation with an implicit Futures position that would be close to the Nymex accountability limit.
The danger of the USO is not in the holdings of a single company but in the collective force that it is starting to have. The market capitalization of the United States Oil Fund is now 63% that of Citigroup and its recent jump in liquidity probably helps its inclusion in asset portfolios. This is also reenforced by the substantial development since the start of the year of structured products linked to the USO. While the returns in the USO have been hurt like any long positions on crude by the contango roll, the share holders of the USO are in the majority sophisticated financial players who have the capacity as well to hedge their roll cost if they choose to do so.
Related links:
WTI-Brent spread narrows – FT Alphaville
It’s all about Cushing – FT Alphaville
A self-propelled pyramid - FT Alphaville