Crude oil short-squeeze in early March? Big money has entered the market

Last month, when retail investors on the WallStreetBets forum were creating a series of short-selling events, JPMorgan Chase stated that they should not pay attention to the current “spectacles” of those small-cap stocks with insufficient liquidity and unprofitability, but to pay attention to what is about to happen. The thing: As quant, momentum and other institutional investors begin to cover short positions in the energy industry, a large-scale short squeeze across the market is about to come. Importantly, JPMorgan Chase also predicted when all this will happen: early March.

 Big money has entered the market

Recently, various funds have taken the lead, intending to take action before large-scale market volatility occurs. Financial Zero Hedge said that the systemic short squeeze predicted by JPMorgan Chase two weeks ago has begun. Ryan Fitzmaurice of Rabobank recently wrote:

“Last week, the one-year rolling momentum signal for Brent crude oil turned from bearish to bullish, making systemic traders more fully betting on their crude oil market forecasts.”
The following are the key reasons why Fitzmaurice may have a big short-surge in the energy industry:

 Big money has entered the market

Last week, investment funds continued to pour into the popular commodity index ETF. As of last Thursday, the inflow of funds has exceeded US$450 million;
He paid close attention to the International Petroleum Week (International Petroleum Week) held last Tuesday to Thursday. When these major industry events are held, the bullish optimism for crude oil tends to heat up.
The total number of open positions in the crude oil futures market is still increasing, and the Intercontinental Exchange’s Brent crude oil futures contract even set a new record, which further supported the rise in oil prices.
The following is Fitzmaurice’s original outlook on the crude oil market:

CTA strategists are “all in”: This is another impressive trading week. Spot prices hit a new high in recent months, giving Brent crude a one-year rolling momentum signal in the past year. For the first time, it turned from bearish to bullish. We believe that the transition of this signal is very critical, because it is an important trading signal commonly used by momentum-driven CTA strategists.

In fact, this signal is related to the crude oil market exposure, trend, momentum and spread signals that we are now closely tracking. The latter all show bullishness, so it has actually made systemic traders fully bet on their predictions. direction.

Of course, more capital flows into CTA funds, declining market volatility, and lower U.S. dollar factors may cause CTA strategists to buy more crude oil. But in terms of direction, as we have seen, the current major signals are bullish.

In addition to the buying of CTA strategists, passive funds continued to flow actively into commodity ETFs last week. This is a trend we have been emphasizing over the past year.

In addition, in recent weeks, well-known investment banks and trading institutions have also issued a series of strong bullish forecasts, which have promoted a strong rise in oil prices. During the International Crude Oil Week last Tuesday to Thursday, the optimism of bullish crude oil also increased significantly.

These factors also provide a good reason for trading institutions to reduce discretionary “long” positions, especially after the strong buying momentum in the market last week. Therefore, if many discretionary “long” positions are closed with profits and machine algorithms continue to buy, it will not be surprising to see a large number of crude oil contracts change owners by then.

 

As we just emphasized, CTA strategists are likely to be big buyers of crude oil futures last week, and they will support the rise in oil prices. In our opinion, they are actually “stud” now. The trend that needs more attention in the future is the substantial increase in capital inflows into commodity index products, which may attract “new” capital into the crude oil market and maintain a strong rise in crude oil and commodity indexes.

Due to the poor performance of alternative assets and the lack of interest from the investment community, the energy industry has been silent for several years. In our view, all of this will change significantly as retail and institutional investors turn to commodities to hedge against rising inflation and falling U.S. dollars.

In fact, nearly $3 billion has flowed into popular commodity index products so far this year, and this trend is not limited to ETFs.

We believe that this is only a small part of the real capital inflow, because many institutional investors and high-net-worth investors are investing funds into the commodity sector through opaque methods such as privately managed accounts.

In addition, the crude oil market occupies a considerable weight in almost all popular commodity index products, so it is a major beneficiary of these capital flows. This trend is also evident in the open interest data of benchmark crude oil futures contracts, which is currently rising and gradually approaching the highs of 2018.

In fact, the total amount of open interest in the crude oil futures market this year has been steadily increasing. The Brent crude oil futures contract on the Intercontinental Exchange even set a new record, which further supported the rise in oil prices.

During the last commodity super cycle (the mid-2000s), there was also a surge in open positions in crude oil futures, when investment in commodity index products was very popular.

Therefore, the breakthrough of open interest data will be a key factor that will determine whether we are in the early stages of the new commodity super cycle or just a short-term bull market.

However, the increase in open positions is at least a necessary condition for maintaining the recent rise in crude oil prices, and it is also a factor that supports oil prices to reach the high levels that some people expect.

This is because there are not many speculative “shorts” to cover, so further increases in oil prices must rely on the increase of speculative “longs”, considering the current extremely loose monetary and fiscal conditions, coupled with economic stimulus measures, this situation It may appear.

 

Looking ahead, we believe that if more “new” funds flow into the commodity market, oil prices may rise to levels that are out of touch with crude oil fundamentals this year.

Therefore, we are paying close attention to the trend of commodity index investment and the open interest data in the crude oil futures market to find the key to breakthroughs. But on the other hand, as we have seen, crude oil fundamentals are still mixed. Given that the current market is generally bullish on crude oil, coupled with short-term overbought signals, the recent mild adjustment in oil prices will not surprise us.

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