A Constant Short Squeeze Threat: Oil Shorts Are At All-Time Highs

Tyler Durden's picture

While market participants will hardly need the caution, having experienced historic moves in the oil complex over the past few days including the biggest two-day surge in seven years at the end of last week, one reason why oil remains so remarkably jumpy on even the tiniest hint of supply rationalization as demonstrated this morning by the latest comments by the Iraqi oil minister, is that the short interest in both WTI and Brent is at nosebleed record highs and continues to rise with every passing week.

As SocGen writes this morning, "we have seen extreme short positioning building up in the oil futures market. The quantity of short positions opened is at an all-time high for Brent, and still high for WTI futures."

 

SocGen correctly notes that there is now an asymmetric profile on oil: "a positive surprise could happen quite sharply, as short positions are likely to be squeezed by a profit-taking move. On WTI, the in-the-money short positions are really dominating at the front end of the curve while out-of-the-money long positions are dominating at the long end of the curve: the front end of oil curve could thus be more exposed to some profit-taking."

SocGen's conclusion is that "deflation fears could turn around rapidly and give more room to reflation and inflation talks" which considering all central banks are now actively blaming low oil prices for their monetary incompetence, is indeed notable.

However, a bigger point is that a sudden jump in oil, one which reprices inflation expectations due to the increasingly more benign base effect, would also therefore revert the hawkish Fed to its original rate hike forecast, one of 4 increases in the Fed Funds rate in 2016, which as a reminder is what unleashed the market volatility in the first place by forcing China to devalue both relative to the USD and relative to a basket of currencies.

As such, perhaps it is only a matter of time before a sharp oil squeeze forces the now record price correlation between oil and risk assets to reverse dramatically on concerns of even more tightening by the Fed and an even more aggressive reaction by the PBOC. Indeed, as SocGen itself admits, "If the strength of the US dollar is the main reason behind the collapse of the commodity/emerging markets complex, a more dovish Fed stance would help."

Alternatively, a dramatic squeeze higher in oil prices would make a more dovish Fed far less likely.

Perhaps Citi, and as of today Deutsche Bank, are right: perhaps we are indeed approaching the day when central bank intervention is not only not stimulative but in fact pushes equity prices lower.

Perhaps.

Until then, we leave readers with what is the simplest catalyst for today's surge: the chart showing that the days ahead of FOMC announcements (like the one tomorrow) almost without fail lead to a dramatic stock market outperformance.

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Omega_Man's picture

crush the shorts... bankrupt them.... pain for all

azusgm's picture

Crush the shorts and the Fed!

Mr. Universe's picture

Those 5-7% moves in oil lately have either been massive pain or gain for some folks. Interestingly enough Gold and Silver are up along with the stawks. Something tells me one of them is not right.

RockRiver's picture

This congestion we are in now is cleaning out a lot of those weak shorts.

Wish the commitment of traders didn't have a one week lagtime......

101 years and counting's picture

thats why i shorted from 90 to 40.  now, whats the point since every headline reading lemming has the exact same thought????

DipshitMiddleClassWhiteKid's picture

sell the fade

 

i dont think all TPTB (ECB,FED RESERVE, BUFFET, GOLDMAN,etc) can prop this up forever. 

 

 

Hongcha's picture

I think you mean, 'prop it down'.

The entire Kabuki theatre, the entire fucking clown show was an attempt to let out all stops to hammer down the price in order to BK Russia a-la the early 1980's.  Collateral damage be damned.  They didn't reckon on a man of Putin's political will, this time.  Max contempt for the cunts running this country on behalf of their Saudi and other masters and to the detriment of their own homeland.  Treasonous Pieces of Human Shit.  End rant/

khnum's picture

Wrong they can and will print to infinity to keep the Wall Street circus going and destroy every fucking economy on the planet in the process

Hongcha's picture

Loves me this squeeze.  "Sit tight and be right" -- Jesse Livermore.

savedeposit's picture

I don need oil, but i need water do ?

QEFinityAndBeyond's picture

When everyone is rich, everyone wins, when everyone wins everyone loses when everyone loses it never counted. Reset the game and try again.

KesselRunin12Parsecs's picture

WWGD? (What would Gartman do)?... Spoiler: Do the OPPOSITE!

cpnscarlet's picture

These shorts would be totally reasonable, but these are the days of HFTs and dishonest investmt banks that know their customers' stops and are willing to recommend one thing and then take the opposite side of the trade.

If these shorts haven't learned this yet, F 'em.

Keltner Channel Surf's picture

May kick myself again (fun wearing your own shoe-prints), but took TNA profits from 10:00 purch's around 12:30, but under normal, past Russell ninja short-bust ramping, I'd look for at least 47 with 48 a best case, end-of-day target, but I'm sure other traders have noted any rare 2016 RUT long setup has turned back at least one signpost short of normal targets, and though any pre-FOMC day has obvious tail-winds (and hot air) in the sails, I'll believe a bone-crusing TNA ramp when I see a 2016 version play out fully.  Good luck out there ...

KesselRunin12Parsecs's picture

I can see that 'channelingstocks.com' software is working out 4u! Or was it the Najarians?

Keltner Channel Surf's picture

God, no, never listen to any Fast Money dorks, my own crazy methods built from 4 yrs of constant RUT-watching, and getting squeezed from Russell ninjas as a newbie almost daily.  (Quite a stiletto wick on that 1:00 candle, but of course they've still got 4 min. to rectify that, if needed ... still I'm feelin' good, but will there be a standard 1:30 re-entry pt today?)

JustObserving's picture

Goldman screwing muppets as usual:

Goldman Sachs makes oil prices drop by Mikhail Leontyev 

Schedule of falling oil prices, adjusted in relation to the current fluctuations, has essentially been a straight line since last September, when prices fell from $ 50 per barrel to the current $ 29. What was so momentous that happened in the world market in September? In September, "Goldman Sachs" lowered expectations for the average oil price for 2016, assuming that it will drop to $ 20 a barrel. "Expectations" of "Goldman Sachs" were "whole-heartedly" supported by "Merrill Lynch", "Bank of America" and others.

There you have it - $ 20, quoted by "Goldman Sachs", was not a forecast. It was the target. Only our own Ministry of Economy is the one that makes forecasts, "Goldman Sachs" , on the other hand, makes the markets. The oil market - is not the market of raw materials. Supply contracts for actual oil makes only 2% percent of the market, the rest - speculative securities, futures and other derivatives. Prices for futures are not determined by supply and demand, but by "expectations". The futures market is completely controlled by the largest US banks. This is the market of expectations, which creates a real "Industry of expectations" using the notorious rating agencies, "independent" experts and the media.

 

http://www.voltairenet.org/article189996.html

carbonmutant's picture

Thr problem here is finding enough money to go long for a position that they can't get out of without a loss...

savedeposit's picture

You can eat oil

But its backed by the dollar yo !

Its just a pet liquefied dinosaur !

Chad_the_short_seller's picture

I think it's kinda foolish to be shorting oil down here especially with so many short, however, oil is still $30 lower that what it needs to be for the shale companies. So I will continue to buy CLR puts on any big short squeeze we get. 

AdolfSchicklgruber's picture

Is anybody else believing this 300 point bullshit rally? Where is Kaiser Souza. Who is buying this hogwash? Maybe Im not understanding something, somebody sees there are a lot of shorts in for oil so they just jack the price of everything without any rhyme or reason. Just jack it all to the moon and back every freaking day?

savedeposit's picture

Its all digital ppt "intervention" in the "free" market !

savedeposit's picture

I am sorry but I am born with this bull-shit detector, and I have trained it

I can see all and every bull-shit there is in the world

Try me if you want

AdolfSchicklgruber's picture

Mine is second to none. These up and down three hundred point days are ri cock u lous. Bullshit of the highest order. Surely it has to stop soon. When does the true carnage start? When do we get 1000 point losses for a week?

savedeposit's picture

Simple answer is not !

(not possible in the current narrative)

Live with it ! (or not)

But you are right that it is "ri cock u lous"

Cheers

savedeposit's picture

Hey, but somewhere down the road things will change

Trust me on that

 

Keltner Channel Surf's picture

Could help explain, but won't likely may you any happier: 

This is part of the standard "mean-reversion" algo-controlled trade that has dominated markets since 2009, no humans at CALPERS or the Harvard Endowment are buying huge after selling huge a few days earlier, it's perfectly automated.   The hallmark of this trade is based on a central moving average, most importantly the 20 DMA (currently S&P ~1930), with indices thrown back toward that central limit once it veers too far away in either direction, based on fun stats like 'average true range' and other ninja math.  The huge lower wick on Jan 20 daily candles, along with other volume clues, were these scofflaws moving in to try their magic.

Of course, in practice it's MUCH more complex, with other moving averages, (%volatility bands around the 200 DMA, etc) coming in-between this central target, deflecting like Jupiter's gravity, but it's rare for stocks to be far from the 20 DMA pre-FOMC, should we lose this today, it could be a rare algo 'shyness' to actually wait for Fed comments, rather than assume the best ...

AdolfSchicklgruber's picture

Thanks, this is a good answer. It sounds like its still bullshit from what you've said. I always thought a "market" implied informed decisions made by humans based on carefully calculated risk/reward research. Markets in this normal paradigm would have some modest shifts day to day but would stay flat for long periods with occasional blips up or down accounting for major technological advancements or major market shocks. We are experiencing nothing like this.

Keltner Channel Surf's picture

What I suspect may account for the crazy volatility is that, for the first time, larger players believe, and are factoring into their equations, a much larger correction potential which, when the lower stops of these mean-reverters are hit, cause some of them to quickly exit, then re-buy in huge fashion after a drop followed by a stable day makes their data more favorable.  I don't think this is one group dragonflying back-n-forth, I believe only very large firms that violently disagree about direction on opposite sides could cause current intraday moves we're seeing. 

From experience, saw evidence the "up" crowd was stronger today, so I entered long at 10 after the huge early pullback, despite what would normally be a "short" signal in my trading methods.  It will likely be a trader's, not an investor's, market for a few months more, and if it breaks just a bit lower, then we could see 30% more in some indices before any 'all clear' will be evident.  That would make for happy ZH campers, I suspect.  Keep the faith ...

herkomilchen's picture

Looks like you mean a 20 DMA with a -3 displacement.

Keltner Channel Surf's picture

Not really, I just looked up to a page of index daily charts I keep in the background quickly (I don't trade SPY) and rounded to the nearest even number :)

I use exponential MA's for the 20s, unlike other DMAs, so I'm sure that comes into play.  So many numbers, so little time (I trade from hourly charts mainly, but keep abreast of any approaching key daily or weekly levels)

My point was that the 20's are still a ways away in all indices, but that's what they're likely gunning for near term.

herkomilchen's picture

Ok, so a 20 EMA then.  Today's daily 20 EMA (0 displacement) based on candle closing price (32.48) was just nearly touched by oil 45 minutes ago (32.41) and oil now appears to be retreating back downward for the day.  Your method worked!

Keltner Channel Surf's picture

So it works in commodities too, go figure.  (Don't say it too loud, for of course the algos text-parse these boards, just like they will with tomorrow's FOMC, though for that they do a practice run using Finnegans Wake, I'm told ...)

herkomilchen's picture

Oh, right.  Too bad then that it doesn't work.  DMA and EMA are completely useless.  What a farce.  Only BTFD works.  And I for one welcome our new algorithmic overlords.  :)

herkomilchen's picture

Why don't we ever see long squeezes.  Would like to see prices erode throughout the day contrary to fundamentals for a change and have people knowingly nod and say, "Can't object, it's a long squeeze."

NEOSERF's picture

Without QE to pump the market, it seems the new process is for someone(s) to move between HYG, Oil, FANGs and just bid the hell out of them, creating artificial algo lust that perpetuates the buying frenzy.  This gets turned off in the last hour of the day and markets corrapse back to the even point or worse.

assistedliving's picture

going long the shorts is the new hedge

Niall Of The Nine Hostages's picture

May all those who are short oil and Russia, and long debt and Islam, forgive me for not wishing them luck, because they'll need plenty.

CADUSD=X is back at 0.71. A good sign we've hit bottom. The question now is how long Riyadh can maintain the WTI<USD40 a barrel target.

silverer's picture

Months back I chased my sister out of UPL (Ultra Petroleum). Should have shorted that one.

azusgm's picture

My nephew hit me with an email this weekend asking about UWTI. Told him to stay far, far away from the stock market and especially ETN's. He is a busy, productive person. Doesn't have time to put on short-term bets and babysit them.

I hope today's move doesn't sucker him in.