Looking For A Reason To Expect A Rally In Oil? Here’s One

What does a “contrarian indicator” look like?

Well, if recent history is any guide, it looks like “smart” money positioning.

Recall that in March, a massive net long in crude was hit with a reality check during CERAweek, catching a lot of folks offsides. And last Friday, when the latest CFTC data hit, we learned that specs had covered the entirety of their 10Y short on the way to building the biggest long position since 2008 on the heels of an extended rally in Treasurys.

Oh, and don’t forget what was perhaps the most hilarious example of extended positioning gone wrong: the Russell 2000 short which got blindsided by the risk-on sentiment that accompanied the market-friendly outcome of the first round of the French elections.

Well, in the same vein, if you’re looking for a reason to get long oil, hedge fund positioning might just be sending you a signal. More below…

Via Bloomberg

Reduction in managed money net-long positions in most recent commitments of traders data could be a catalyst for an oil market rally, according to Saxo Bank head of commodities strategy Ole Hansen and PVM Oil Associates analyst Tamas Varga.

  • “You could view that as bullish,” says Varga of most recent CFTC data. “The net speculative length is so low now that they’re going to start putting money back into the market”

OilBBG

  • Brent managed money net-length slipped to 358k lots, lowest since week ending Nov. 29; WTI net-length slips to lowest level in a month
  • “There’s more balance between longs and shorts,” Hansen says. “In order for the market to stabilize and have a solid foundation to rally from, that was probably required”
    • Hedge funds’ ratio of Brent long positions to short at 4.6:1, lowest in a month; WTI at 4.2 long positions for every 1 short
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