Crude oil liquidation, natural gas accumulation
Traders’ exit from crude oil and petroleum positions in favor of natural gas elevates reversion risks. October’s recovery of about 5% in the Bloomberg Natural Gas Subindex coincided with a sharp increase in managed-money positions, achieving the highest level of net longs in the database since 2006. Priced for cold weather should leave the market a bit vulnerable when it comes, with the potential to be less extreme than expected.
Mean reversion in crude oil was October’s predominant energy-performance story, but positive total returns should remain supportive. The Bloomberg Energy Subindex Total Return of almost 13% outpaced about 12% for the spot index through Oct. 29. It’s been four years since energy has posted positive roll returns.
Crude oil should be range-traders’ delight
There’s little room for the crude-oil bull to run, but the downside should also be limited, resulting in an extended range-trading market, in our view. The one-year curve trending into backwardation, a primary bull-market companion, has reached a significant peak and is flat again. Responsive traders are likely to prevail. Traders that held WTI resistance near $75 a barrel are likely to be in force, supporting $65. In the midst of the most significant drawdown since last June’s trough, if that correction is matched, WTI would likely revisit about $60.
It wouldn’t be a first. Since the nadir in 2016, WTI had two 24% drawdowns. The current is 15% to Oct. 24, which has returned the market to the first revisit of the 52-week average in a year. The trend remains up, but key indicators point to a range-bound market.