Best of the Week
Most Popular
1. Five Charts That Show We Are on the Brink of an Unthinkable Financial Crisis- John_Mauldin
2.Bitcoin Parabolic Mania - Zeal_LLC
3.Bitcoin Doesn’t Exist – 2 - Raul_I_Meijer
4.Best Time / Month of Year to BUY a USED Car is DECEMBER, UK Analysis - Nadeem_Walayat
5.Labour Sheffield City Council Election Panic Could Prompt Suspension of Tree Felling's Private Security - N_Walayat
6.War on Gold Intensifies: It Betrays the Elitists’ Panic and Augurs Their Coming Defeat Part2 - Stewart_Dougherty
7.How High Will Gold Go? - Harry_Dent
8.Bitcoin Doesn’t Exist – Forks and Mad Max - Raul_I_Meijer
9.UK Stagflation Risk As Inflation Hits 3.1% and House Prices Fall - GoldCore
10.New EU Rules For Cross-Border Cash, Gold Bullion Movements - GoldCore
Last 7 days
Government Shutdown Ends – Markets Ignore Looming Debt and Bond Market Threat - 23rd Jan 18
Stock Risks to Watch: Choose Your Bear Market Dashboard - 23rd Jan 18
Worse than Watergate - Release the Memo - Investigate Uranium One - 23rd Jan 18
CAT Stock Bouncing after JPM Upgrade How High and How Long Can This CAT Jump? - 23rd Jan 18
Why Banks Will Be Slammed In The Next Crisis—And That May Be Good News - 23rd Jan 18
Medicare Premiums Are A Shared Pool - Coming Changes That Will Transform Retirement - 23rd Jan 18
Charged Atmosphere of Heavy Police and Security Presence at Sheffield Street Tree Felling Protests - 23rd Jan 18
Pension Crisis And Deficit of £2.6 Billion At Carillion To Impact UK - 22nd Jan 18
Two Factors for Gold That You Don’t Want to Miss - 22nd Jan 18
Why You Must Own Silver in 2018 - 22nd Jan 18
This Could Be The Hottest Mining Stock Of 2018 - 22nd Jan 18
Stock Index Trend Trade Setups for the SP500 & NASDAQ - 22nd Jan 18
Stock Market Deceleration / Distribution - 22nd Jan 18
US Markets vs Govt Shutdown: Stock Markets at all time highs - 22nd Jan 18
Land Rover Discovery Sport - 1 Month Driving Test Review - 22nd Jan 18
Why should you use high-quality YouTube to mp3 converter? - 22nd Jan 18
Silver As Strategic Metal: Why Its Price Will Soar - 21st Jan 18
Stocks, Gold and Interest Rates Three Amigos Ride On - 21st Jan 18
Why Sometimes, "Beating the S&P 500" Isn't Good Enough - 21st Jan 18
Bunnies and Geckos of Sheffield Street Tree Fellings Protests Explained - 21st Jan 18
Jim Rickards: Next Financial Panic Will Be the Biggest of All, with Only One Place to Turn… - 20th Jan 18
Macro Trend Changes for Gold in 2018 and Beyond - Empire Club of Canada - 20th Jan 18
Top 5 Trader Information Sources for Timely, Successful Investing - 20th Jan 18
Bond Market Bear Creating Gold Bull Market - 19th Jan 18
Gold Stocks GDX $25 Breakout on Earnings - 19th Jan 18
SPX is Higher But No Breakout - 19th Jan 18
Game Changer for Bitcoin - 19th Jan 18
Upside Risk for Gold in 2018 - 19th Jan 18
Money Minute - A 60-second snapshot of the UK Economy - 19th Jan 18
Discovery Sport Real MPG Fuel Economy Vs Land Rover 53.3 MPG Sales Pitch - 19th Jan 18
For Americans Buying Gold and Silver: Still a Big U.S. Pricing Advantage - 19th Jan 18
5 Maps And Charts That Predict Geopolitical Trends In 2018 - 19th Jan 18
North Korean Quagmire: Part 2. Bombing, Nuclear Threats, and Resolution - 19th Jan 18
Complete Guide On Forex Trading Market - 19th Jan 18
Bitcoin Crash Sees Flight To Physical Gold Coins and Bars - 18th Jan 18
The Interest Rates Are What Matter In This Market - 18th Jan 18
Crude Oil Sweat, Blood and Tears - 18th Jan 18
Land Rover Discovery Sport - Week 3 HSE Black Test Review - 18th Jan 18
The North Korea Quagmire: Part 1, A Contest of Colonialism and Communism - 18th Jan 18
Understand Currency Trade and Make Plenty of Money - 18th Jan 18
Bitcoin Price Crash Below $10,000. What's Next? We have answers… - 18th Jan 18
How to Trade Gold During Second Half of January, Daily Cycle Prediction - 18th Jan 18
More U.S. States Are Knocking Down Gold & Silver Barriers - 18th Jan 18
5 Economic Predictions for 2018 - 18th Jan 18
Land Rover Discovery Sport - What You Need to Know Before Buying - Owning Week 2 - 17th Jan 18
Bitcoin and Stock Prices, Both Symptoms of Speculative Extremes! - 17th Jan 18
So That’s What Stock Market Volatility Looks Like - 17th Jan 18
Tips On Choosing the Right Forex Dealer - 17th Jan 18
Crude Oil is Starting 2018 Strong but there's Undeniable Risk to the Downside - 16th Jan 18
SPX, NDX, INDU and RUT Stock Indices all at Resistance Levels - 16th Jan 18
Silver Prices To Surge – JP Morgan Has Acquired A “Massive Quantity of Physical Silver” - 16th Jan 18
Carillion Bankruptcy and the PFI Sector Spiraling Costs Crisis, Amey, G4S, Balfour Beatty, Serco.... - 16th Jan 18
Artificial Intelligence - Extermination of Humanity - 16th Jan 18
Carillion Goes Bust, as Government Refuses to Bailout PFI Contractors Debt and Pensions Liabilities - 15th Jan 18
What Really Happens in Iran?  - 15th Jan 18
Stock Market Near an Intermediate Top? - 15th Jan 18
The Key Economic Indicator You Should Watch in 2018 - 15th Jan 18
London Property Market Crash Looms As Prices Drop To 2 1/2 Year Low - 15th Jan 18
Some Fascinating Stock Market Fibonacci Relationships... - 15th Jan 18

Market Oracle FREE Newsletter

6 Critical Money Making Rules

Crude Oil Market Speculation Argument to be Tested by WTI Rollover Cycle

Commodities / Crude Oil Apr 05, 2011 - 04:13 AM GMT

By: Dian_L_Chu

Commodities

Best Financial Markets Analysis ArticleThe monthly roll cycle starts Tuesday April 5th for Crude Oil with the 4-day rolling of USO positions, the USO is an exchange traded security meant to track movements in the WTI futures contract. This happens over a four day period now from the 5th-8th of April, so that traders cannot easily front-run the rollover process.


Rolling, Rolling, Rolling - USO, Brent & WTI

Nevertheless, obviously with the price of Crude rising, the USO has to sell a lot of front month longs in the May contract to rollover to the June contract. Based on the listed holdings as of Monday April 4, USO will roll over 8,400 WTI Crude Futures for the May contract on the ICE exchange, and also has to rollover 8,821 CL Crude Futures for the May contract on the Nymex exchange, and 2,000 Crd. Oil Fincl. Futures WS for May also on the Nymex exchange.

Next we have the Brent contract Rollover schedule which begins with options that expire on the 12th of April with the futures contract expiring on the 15th of April. However, expect traders to position ahead of the actual expiration date as most traders will roll their Brent futures contracts sometime between the 8th and the 13th and for options the 8th through the 12th serves as a good rule of thumb.

For the WTI rollover we have options expiring on the 14th of April, and futures on the 19th of April, but again most of the rollover takes place prior to the last 2 days of the date of expiration. So expect most traders to rollover positions somewhere between the 12th through the 15th of April. For options activity it would be the 12th through the 14th.

Trader Rolling Technique

The roll methodology can take several different directions according to trader`s expectations. Besides the procedural roll of the USO, which over 4 days they sell May contracts and buy June contracts in the same instruments; however, for the rest of the traders there is more discretion involved.

For example, often times traders know that a large base of positions have to be rolled over, so they close out their positions, and wait for the selling to end before then buying the next month`s contract to keep their original bias in the market. Some traders even short the market at the same time they are closing out their original longs because they know that a large roll of longs will be closed out, so they piggy back on the rollover for additional profits.

This is oftentimes why you experience 4 or 5 days of weakness due to the selling, and shorts piggybacking on the rollover, with two days of strength in the expiring contract as the shorts have to go long to close out their positions before the contract expires.

Recent Rollover Pattern

If we look at recent contract rollovers for the last several months, the pattern has been to move up the futures contract from the last two days of the expiring contract, and right up until the USO starts the entire rollover sequence again. As such, most of the gains for each new month come right at the beginning of the next month’s contract being the front month.

The reason for this is apparent, as new money can come into the contract with new positions without the worries of having to rollover their position or take physical delivery. Again, we saw this with this month`s contract, so the pattern is holding.

Test Case for Market Speculation

However, we have an interesting test case for markets, and the long standing argument that markets are never run-over by speculators, because in the end, all market participants have to take physical delivery or close out their positions, so they cannot affect price over the long term.

Well, with Cushing inventories at record highs, literally bursting at the seams (see charts below), and only going to get worse over the next two weeks, and given the fact that the WTI contract is deliverable at the Cushing hub, we will finally test whether that hypothesis is true.

No Storage = Close Out Long Positions 

In other words, there is no way traders can take delivery on enough crude for the expiring May contract to not go down from current levels, because there isn`t sufficient storage capacity. Anybody who opened a new position for the May contract, and there were lots of newly created long positions with a rising oil price for this contract, must close out these longs by selling the May contract, thus making the front month go down.


The reason it is a test is that unless traders arrange for a bunch of tanker trucks to back up to the Cushing hub, which is mighty expensive and cumbersome, also considerations of what you do with the Oil after taking delivery, i.e., major additional transportation and storage costs, and the WTI contract doesn`t go down, we now know that the taking physical delivery argument is an invalid argument.

Spotlight on Speculators If Oil Price Still Moves Up

Moreover, there are ways to move up futures contracts without taking physical delivery. All of which would shine a bright spotlight on the role and power of speculators in driving up Oil prices, and how previous regulations have failed to address the major divergences between the underlying supplies in the market, and the prices reflected by the futures contracts trading on the exchanges.

It seems that if we look back at 2008 where Oil prices basically went from $143 to$33 a barrel in six months, and Oil being a rather inelastic commodity, that some of the practices that go on in regard to speculation in this commodity, have been stubbornly neglected and overlooked by regulators.

Oil Market - Vegas Style Casino 

If these boom and bust price spikes continue because they are not truly reflective of underlying fundamentals. As they push markets in both directions far past the underlying supply and demand dynamics of the market, this price instability isn`t good for consumers, producers, exporters, importers, refiners and the global economy.

Having a healthy, stable Oil market devoid of excessive speculation is in everyone`s best interest over the long haul. What the regulatory framework needed to accomplish this lofty goal is another matter entirely.

However, one thing is for certain--the Oil market reflects more of the characteristics of a Las Vegas Casino game, and less the characteristics of a hedging instrument used for legitimate price discovery of the underlying commodity reflected by supply and demand fundamentals in the marketplace.

Dian L. Chu, M.B.A., C.P.M. and Chartered Economist, is a market analyst and financial writer regularly contributing to Seeking Alpha, Zero Hedge, and other major investment websites. Ms. Chu has been syndicated to Reuters, USA Today, NPR, and BusinessWeek. She blogs at http://www.econmatters.com/.

© 2011 Copyright Dian L. Chu - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules