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There is much current focus on the degree of spec long positioning in the WTI contract, which now stretches to more than three-quarters of a billion barrels equivalent (for a combined value of roughly $47 billion at the time of writing). In what is a telling sign of our fixation with all things financial and therefore of our habitual neglect of the substance beyond the symbols, What tends to go unremarked in such commentary is the role being played by the hedging needs of producers themselves. This is so, even though the EIA itself drew attention to the phenomenon shortly before Christmas, when it noted that an examination of Q3’s financials issued by 47 large US firms revealed that they had locked in selling prices on something of the order of 1.2 Mbpd during the trimester. In all, that would amount to the sale of ~110,000 contracts over the period and, indeed, we can see from the COT reports that net commercial shorts on NYMEX rose from 340k to 455k –i.e., by a closely matching 115k. One happy effect of this from a commodity investor’s point of view is that these heavy forward sales, coming at a time of relative supply tightness, have pushed deferred contracts below the near ones—a condition termed ‘backwardation’, the reader will recall— and so adding a useful component of ‘roll-yield’ to the outright price appreciation of crude itself. The drillers in question, the EIA tells us, have been making great strides in increasing output, to the point that total US supply has finally surpassed the briefly-attained peak of 10Mbpd, attained way back in 1970. Moreover, the agency has been sufficiently impressed by the performance to further increase its forecasts for the coming quarters, revising its year-end estimate up by 1/2Mbpd to 11Mbpd and placing the immediate peak a further 200k higher by the middle of 2019. Though we have still a few weeks to await the corresponding reports for the final quarter of 2017, the CFTC shows us that the total of net shorts then mounted once more to 640k net—a gain of an additional 185k , or 2.1Mbpd—before January witnessed another surge to the 764k we alluded to above, this time representing a further 1.3Mpbd on a quarterly basis. The caution here, if we examine this latest acceleration, is that it seems a little too rapid to be due only to organic, commercial activity. Looking at the daily run-rate of position accumulation, QIII scored ~1.2Mbpd and QIV 2.1Mbpd, as we have seen, then January rocketed to a whopping 4Mbpd. The conclusion is inescapable: the momentum chasers are back in town, warranting a good deal of caution as to price development in the event of any minor reversal of the trend. Pumpin’!

S. Corrigan