With speculative positioning in VIX futures at record shorts (most bullish), and speculative longs in Dow and Nasdaq at or near record highs, we have one more "most hated rally" statistic to add to the pile of exuberance. The open interest in S&P 500 ETF (SPY) call options has never been higher as the last few days panic-buying leveraged long positions lifted exposure above summer 2011 highs...
For the last 22 minutes, VIX has not moved and S&P has coiled extremely tightly... with record short VIX positioning and record long US equities positioning, one wonders what happens next? (Especially given The Fed's hawkish jawboning).
Morgan Stanley's Adam Longson confirmed overnight that he isn't going to change his bearish oil call any time soon, with a warning that "very little has been addressed fundamentally to correct these problems. Greater headwinds lay ahead, especially for crude oil. In fact, we would argue that recent price action and developments may have exacerbated the situation." Putting a number to his call: oil will slide to $35 in the next 1-3 months.
Despite a significant build at Cushing (Genscape +300k), tumbling China demand, and Libyan supply, the ever more financialized crude oil market is aoneway street higher of short-squeezing exuberance. As 2015's August explosion plays out again, WTI Crude just broke back over $43 as record shorts suffer...
WTI Crude is up over 6% in 24 hours, since yesterday's surprise build (and production cut) as the machines squeeze out an over-exuberant short positioning once again. However, just as we saw last year around this time, Astenbach's infamous oil veteran Andy Hall is warning a "violent reversal higher" looms again amid extreme positioning and potentially improving fundamentals. Exaggerating the move further is the surge in the contango which has once again made sea-storage profitable, sending yield-seeking traders into the carry trade (and squeezing shorts further).
"... one would expect this scenario to happen once every ~10,000 years. The fact that we see this type of behavior demonstrates market inefficiency—in this case driven by hedging of option exposure. Quite literally, the market was pinned. Over the past 3 weeks, the amount of call options exceeding put options (in terms of gamma exposure) averaged almost $40bn (per 1%), which is the largest call to put gamma imbalance ever observed."
Crude oil inventories in the U.S. have fallen 23.9 million barrels since the end of April, but, as Bloomberg notes, oil bulls counting on further declines are fighting history. Over the past five years refiners' crude demand has fallen an average of 1.2 million barrels a day from the peak in July to the low in October... "The rough part will be once refineries start going into maintenance,... we aren’t drawing down inventories very fast and the pressure on prices will increase."
Gasoline stocks held independently in the Amsterdam-Rotterdam-Antwerp (ARA) hub rose more than 12% to an all-time high in the week to Thursday. This comes at an awkward time for the industry: just as Chinese gasoline exports soared by 75% in one month, prompting concerns about the future of the price of oil.
"this aggressive “bidding” is sufficient to cause us to abandon our modest, one unit long positions in crude immediately upon receipt of this commentary. Being wrong is part of the business we are in; remaining wrong is anathema and the market is about to tell us that we are very, very wrong."
As China's deflationary refined product finally hits the world, and leads to a flood of gasoline and diesel across the continents, a curious development is the build up of gasoline tankers in New York City's own harbor...
What follows is how JPM manipulated the silver markets by selling the Silver contango during illiquid hours, then used their deep pockets to push settlements, then waited until margin calls made the large locals puke their positions. JPM in effect stretched the relationship between forward rates and futures spreads until they made no sense anymore. Not unlike a company trading at 50x earnings. It cannot last long. But it only has to last long enough until the guy with the position opposite you has to liquidate.